Rights Accumulation Programs

One bottleneck apparent by 1989 was that the largest outstanding arrears could be settled only with substantial grants from donor countries friendly to the debtors. Donors were reluctant to take on that burden by themselves, especially because the immediate direct benefit would be repayment to the IMF, not an increase in social spending in the indebted country. To break the bottleneck, the Fund needed some means to make its own financial contribution to the settlement of arrears. The most obvious and straightforward solution—rescheduling the loans similarly to the way the Paris Club dealt with nonperforming bilateral loans—was precluded by the Fund’s policies and was anathema to most of the Fund’s creditor members.

Informal discussions among the staff, management, and Executive Directors led to the emergence of the “rights approach” in January 1990. The basic idea, as developed by the Deputy Managing Director, Richard D. Erb, was relatively simple. If a country had arrears to the Fund and was ineligible to borrow, and if the country wanted to cooperate with the Fund to work its way out of the problem, the Fund could agree to monitor policy implementation for a few years. It could also agree to make a provisional commitment to lend to the country at the end of that period, by allowing the country to accumulate “rights” up to the approximate level of the country’s outstanding arrears. During that time, a “support group” of donor countries would help finance the country’s balance of payments and development needs. The country would be expected to make regular payments to the Fund to keep its arrears from rising. Once the country had accumulated enough rights to settle its arrears, the Fund would approve a new stand-by or similar arrangement and immediately apply the rights in settlement of the old obligations and as an upfront disbursement under the new arrangement. These transactions would effectively reschedule the debts to the IMF and begin a fresh lending arrangement on normal terms.

The Executive Board discussed this proposal extensively in a series of meetings from late January through April 1990. The approach survived essentially intact, but with two major changes from the original proposal.

The first change was to introduce an intermediate step to separate the new arrangement from the previous one. This step obscured the fact that the Fund was engaging in a de facto rescheduling. At the end of the rights accumulation period, the donor support group would be expected to provide a very short-term bridge loan enabling the country to repay its outstanding obligations. Only after the country had applied the proceeds to settle its arrears would the Fund approve the new lending. The borrower could then use the initial disbursement from the Fund to repay the bridge loan, at which point all of the old balances would be fully cleared. These transactions would normally take place within a day or two, but the sequencing was viewed as essential to preserve the principle that the new arrangement was independent of the old.

The second stumbling block concerned the risk that the Fund might tie up sizeable amounts of its scarce financial resources for years while countries completed their Rights Accumulation Programs (RAPs) and that it then would disburse large sums up front to countries that might still face uncertain economic and political prospects. Approval of the program therefore became closely linked to approval of other elements of the strengthened strategy, as discussed below.

The Interim Committee endorsed the rights approach in May 1990, and the Executive Board agreed on the way in which to implement it in a series of meetings in June. The final agreement on “modalities” was adopted on June 20, 1990, not in the form of a formal decision but rather through a Summing Up of the discussion by the Managing Director.³

A central feature of the rights approach was that it was limited to the 11 countries with protracted outstanding arrears when the approach was initiated, and it was available only for a limited time. These limitations were imposed to avoid moral hazard opportunities for countries that might stop repaying the Fund in the future or that might delay agreeing to a new Fund-approved policy program. Moreover, the Fund did not expect all of the eligible countries to take advantage of the plan. Guyana and Honduras were on the verge of settling their arrears and would have no need for the new program. Others were not expected to qualify in time.

Within two years, three countries—Peru, Sierra Leone, and Zambia—had embarked successfully on RAPs. As discussed more thoroughly in the next section, all three completed the process successfully, cleared their arrears by 1995 at the latest, resumed borrowing from the Fund on good terms, and serviced the new debts without further difficulty. Five other eligible countries—Cambodia, Guyana, Honduras, Panama, and Vietnam—cleared arrears in that same period without recourse to the rights approach. That left just 3 of the original 11 countries—Liberia, Somalia, and Sudan—all with long-standing domestic political problems that kept them far from qualifying for a RAP. Nonetheless, the Board held out hope by repeatedly extending the deadline for qualification. At the end of the 1990s, the rights approach was still in place, awaiting the opportunity for renewed cooperation from those three countries.⁴

Remedial Actions and the Third Amendment

Until 1989, the IMF had few options for ratcheting up pressure on a country to settle its arrears. It could issue public declarations that the member was ineligible to borrow, but the next step would have been to expel the miscreant from membership. Because that step would usually be counterproductive and make it nearly impossible to collect the outstanding debt, the declaration of ineligibility was, for all practical purposes, the last arrow in the quiver.

In 1986, Yusuf A. Nimatallah, the Executive Director for Saudi Arabia, called for an amendment to the Articles of Agreement to allow the Fund to suspend a member’s voting privileges and its right to accept quota increases. That suggestion was strongly opposed by Directors from developing countries—including the Dean of the Board, Alexandre Kafka (Brazil)—and it was quietly dropped.⁵

As an intermediate step, a deeply divided Executive Board approved a policy of public censure in 1989. Under this new “naming and shaming” procedure, the Fund could publicly declare a country to be failing to cooperate in efforts to resolve its problems, and the Managing Director could write directly to Governors from other interested countries and to the heads of other multilateral institutions, informing them of a country’s failings.⁶ No one expected these decisions to do much to reduce outstanding arrears. The outcome left the hawks on the Executive Board dissatisfied because too little was being achieved, and it left the doves frustrated because the emphasis was on punishment rather than assistance.

The United States revived the idea of suspending membership rights in 1990 and devised an effective strategy for getting it adopted. Amendments to the Articles of Agreement require the support of 60 percent of the membership holding 85 percent of the voting power. Therefore, amendments cannot be enacted without broad support from both industrial and developing countries. Those requirements posed a large challenge, but the U.S. authorities saw the goal as at least symbolically important. According to their Executive Director in the Fund, Thomas C. Dawson II, they

believe … that a country which does not live up to the obligations of membership should not be allowed to enjoy the rights and privileges associated with membership. A voice and vote in the affairs of the IMF are among the most basic rights of membership in the institution. Therefore, a strengthening of the remedial measures [on a country in arrears] should include suspension of the country’s voting rights and representation on the Board of Governors, Interim Committee, and Executive Board.⁷

The Board debated this proposal extensively in several long days of meetings in February 1990. Although the membership was still split, with some opponents calling it unacceptable, support for it by several creditor countries was sufficiently strong to compel the staff to draft an amendment to the Articles. The Fund’s Legal Department promptly did so, despite the amendment having no chance of being ratified on its own. At that point, the U.S. authorities found an irresistible linkage. After eight years of heavy lending activity in response to the debt crises of the 1980s, the IMF badly needed a replenishment of its resources through a general increase in quotas. The United States was prepared to support an increase, but now it made its support conditional. When the Executive Board discussed the draft amendment in April, Dawson informed his colleagues that the U.S. authorities would insist “that the quota resolution should provide that any quota increase will become effective only when the amendment of the Articles of Agreement providing for suspension [of voting rights] has been ratified and adopted by the necessary 85 percent majority vote.”⁸

Few Directors embraced the U.S. linkage proposal, but they all understood that neither the quota increase (which almost everyone favored) nor the amendment could pass without U.S. support.⁹ Even if the U.S. authorities were bluffing, the danger remained that the U.S. Congress would refuse to ratify the increase without the amendment. A narrow majority—all from creditor countries—favored amending the Articles, and now they had the leverage to force the issue.

The Interim Committee endorsed the amendment in May 1990, and the Board of Governors approved it a month later. Only 61 percent of the membership, with 79 percent of the voting power, voted in favor, but that was enough to adopt the resolution and initiate the ratification process.¹⁰ Remarkably, it had taken just five months to draft, debate, and approve a complex and highly controversial amendment.

The most arduous leg of this journey was the last. The bitterness produced by the strong-arm tactics of the majority did not quickly dissipate, and the first few months of attempts at ratification made it clear that reaching the 85 percent threshold would not be easy. Raising the rhetorical ante, Camdessus told Executive Directors in September 1990 that “what is now at stake is the life and future and the credibility of the institution.”¹¹ If the quota increase did not take effect by the end of 1991, the resolution was scheduled to lapse. Most likely, the Fund would be left without the resources to meet members’ requests for loans even earlier.

The ratification process dragged on throughout 1991, at the end of which the Executive Board reluctantly agreed to extend the deadline to June 30, 1992. By April of that year, 112 members with more than two-thirds of the voting power had ratified the amendment. The main but not the only holdout was the United States, owing both to the cumbersome legislative procedures for getting all elements of the required legislation adopted on identical terms by the Senate and the House of Representatives and to the delicacy of domestic politics in a presidential election year. Finally, in the last week of October and just days before the election, the United States completed those steps and ratified the amendment.

The Third Amendment entered into force on November 11, 1992.¹² With this amendment, the “remedial” strategy for escalating pressure on countries in arrears was complete. It encompassed the following steps, to be taken in order:¹³

The Fund recognized that in some cases, it might be necessary to reverse some of these steps to encourage countries to strengthen their efforts to settle arrears. In April 1992, the Executive Board agreed that a declaration of noncooperation could be withdrawn while arrears remained outstanding if the Fund determined the member was cooperating in trying to resolve the matter. In July 1999, the Board adopted more comprehensive de-escalation policies, though the policies were limited to the lifting of declarations of noncooperation and suspensions of voting rights.¹⁵

Other Policy Changes

As the Fund gained experience with the intensified collaborative approach, it continued to tweak its policies. A series of mostly minor changes in the early 1990s had the combined effect of guarding against new arrears, reducing obstacles to the settlement of old arrears, and shoring up the Fund’s finances if some large balances remained outstanding for a long period.

Preventive measures. To help prevent new problems from arising, the staff set out to strengthen its ability to analyze countries’ financial capacity to service external debts and ultimately repay the Fund. Previously, the IMF had acted on the assumption that if a borrowing country strengthened its macroeconomic policies and met the conditions set out in a stand-by arrangement, it would have the capacity to repay the loan. After all, the fundamental characteristic of the Fund’s “financial programming” exercise underpinning its loan conditions was a quantitative analysis of the links between macroeconomic policies and the balance of payments. The failure of several countries to service debts to the Fund in the 1980s forced the staff to consider new paradigms in which “capacity to repay” could be analyzed more directly.

Beginning in mid-1990, the policy became that every staff mission in response to a member’s request to borrow should discuss the country’s debt-servicing capacity with the authorities, and each staff report should include an explicit assessment of the country’s capacity to repay the Fund. It also should include an assessment of possible risks that could throw the economy off track, including in the period after the Fund-supported program ended but the loan was still outstanding, and of contingency plans to deal with adverse shocks. More subtly, the staff was also asked to examine the country’s record of servicing its external debts to the Fund, multilateral development banks, and other creditors. Any danger signs in this record were to be noted. In retrospect, this type of risk analysis seems quite basic, and no more than what any auditor would expect to see from a well-run financial institution. At the time, it was a notable cultural departure from the IMF’s history as a membership organization in which every country was given the benefit of the doubt until a problem materialized.

One way the Fund had always tried to ensure borrowers would have the resources to repay their loans was to require borrowing countries to maintain minimum levels of official international reserves. In practice, this often meant Fund resources would simply be added to the borrower’s foreign exchange reserves. Such loans were not intended to facilitate government spending directly, but rather to shore up the balance sheet so external trade could be financed more smoothly. If the country’s reliability in managing its reserves was open to doubt, the Fund could ask it to accept disbursements in SDRs rather than in U.S. dollars or other convertible currencies and to hold the SDRs in the member’s account at the Fund. As part of the strengthened arrears strategy in 1990, the Fund began to employ this latter tactic more widely.¹⁶

Financial policies. A major consequence—perhaps the major consequence—of the failure of some countries to service and repay their debts was the financial burden it placed on all other countries, including the poorest. The IMF responded in two ways. First, it had to increase its own reserves to cover the possibility that some loans might never be repaid. Second, it decided to impose what amounted to (but pointedly were not called) penalty rates of interest on overdue obligations.

As recounted in the previous History, the Fund established procedures beginning in 1986 to ensure it had adequate reserves to cover potential losses on overdue obligations. Because the Fund was created as a cooperative institution with no allowance in its Articles for writing off bad debts, and because the Fund’s outstanding credits are legally distinct from loan contracts, the Executive Board did not establish an account that explicitly contained provisions for loan losses. Instead, it agreed to set up an account—the Special Contingent Account (SCA)—linked more generally to the amount of outstanding balances in protracted arrears. The SCA was funded by transferring excess net income each year (i.e., income in excess of a target level set by the Board at the start of the year). That excess income would be generated by temporarily reducing remuneration paid to creditor countries and raising interest charges to debtor countries under the Fund’s “burden sharing” policies. The terms of the SCA provided that it would eventually be terminated and distributed proportionally to those same creditor and debtor countries once the extra reserve was no longer needed.¹⁷ In addition, the Board gradually increased the target level for net income, which was added to the Fund’s general reserves. By April 1990, these actions had raised the ratio of reserves to arrears-related credits (credit outstanding to countries with arrears) from a counterfactual 48 percent (what it would have been in the absence of the policy changes) to 63 percent: an improvement, but not sufficient for comfort.

A potential constraint on the size of the SCA was a provision that the remuneration rate to creditors could not be reduced below 85 percent of the SDR interest rate. The Board had agreed on this floor when it established the burden sharing mechanism in 1986. The Articles of Agreement allowed for a looser restriction, setting the floor at 80 percent. In 1990, Dawson (United States) offered to accept the 80 percent floor if the Board would agree to sell or otherwise mobilize a small portion of the IMF’s gold stock as an additional way to shore up the Fund’s financial protection against a loan default.¹⁸

Camdessus responded to Dawson’s initiative by proposing to create a second SCA aimed at generating an additional SDR 750 million in reserves, with more of the burden shifted to creditor countries. To apply a comparable increase in charges to borrowers, he argued, would raise serious issues of risk. In contrast to the original SCA with its equal burdens, this new “SCA-2” would be funded two-thirds by creditors and one-third by debtors. After some discussion, the Board agreed to this proposal, with the modifications that the SCA-2 should generate SDR 1 billion in reserves and that creditors should bear 75 percent of the burden, subject to the 80 percent floor on the rate of remuneration.¹⁹

The Managing Director could have justified this “extended burden sharing” and the establishment of SCA-2 as a necessary and prudent action to cover the risks arising from overall arrears cases. Instead, he proposed it as also necessary to provide “backing” for the RAPs the Fund was preparing to approve. That generated a bit of an uproar. Several Directors from developing countries wanted to know: If a country settled its arrears, successfully completed a period of policy implementation under the Fund’s watchful eye, and then began borrowing anew, why would the Fund need extra backing for these new commitments? The short answer was that the SCA-2 was needed to provide comfort to creditor countries and therefore was a sine qua non for their support for the rights approach. In addition, even without the link to the RAPs, it might be needed for the broader purposes of financial prudence.²⁰ These differing perspectives delayed approval of the SCA-2 for a few months, but it was eventually approved in June 1990.

Over the next seven years, the Fund accumulated the SDR 1 billion in the SCA-2. Overall, the Fund’s precautionary reserves more than doubled, from SDR 1.61 billion in April 1990 to SDR 3.76 billion seven years later. Nearly three-fourths of the increase took the form of transfers to the two SCAs. The rest accrued through the normal retention of net income. At the same time, the settlement of several outstanding arrears cases lowered the outstanding balance that was notionally measured against this reserve from SDR 2.57 billion to SDR 1.86 billion.²¹ The IMF had sufficient cover for any potential defaults, and the financial concerns gradually faded away.²²

The second part of the U.S. initiative—mobilizing gold—took much longer, although the process got under way quickly. In April 1990, Dawson clarified that the United States wanted a commitment by the IMF to use a portion of its gold stock “to backstop resources of the Enhanced Structural Adjustment Facility [ESAF] to finance purchases under the rights program.”²³ On that understanding, the staff hurriedly prepared a specific proposal, which the Executive Board discussed and approved in principle in early May.²⁴ The Interim Committee endorsed it in its communiqué the following week:

The Committee concurred with the proposal that the Fund pledge use of up to 3 million ounces of gold, if needed, as additional security for use of the resources of the [ESAF] in connection with the financing of the [RAPs]. It urged that members approve the decisions necessary to establish such a pledge as soon as possible.²⁵

The difficulty at that point was that any commitment to sell gold had to be approved with an 85 percent majority before it could be implemented.²⁶ Although the United States had requested the pledge, the U.S. Executive Director could not vote for it under U.S. law until he was authorized by Congress to do so. The government submitted the necessary legislation, but it worked its way slowly through the system and did not become law until the fall of 1992. Only then could the Executive Board sensibly return to the issue and adopt the proposed decision.²⁷ The Board finally did so in February 1993, without dissent.²⁸

Although the gold pledge remained in place throughout the decade and beyond, it was never activated. Both Sierra Leone and Zambia encashed their rights to draw on the ESAF Trust, but they serviced those debts on time and in full. Hence, the trust suffered no losses, and the Fund had no reason to sell any gold.

The cumulative effect of “special charges” on overdue obligations posed another financial obstacle to the settlement of arrears. One of the Fund’s first acts to control the problem, taken in December 1985, was to raise the interest rate on overdue obligations above the standard rate of charge. The intention was to shift the burden onto the countries with arrears rather than forcing all borrowers to pay higher rates to cover the institution’s costs (Boughton, 2001, pp. 811–12). Over the next five years, through January 1991, the Fund imposed a total of about $312 million in special charges on 38 countries. Of that total, only about $55 million was collected. The rest was added to the balance in arrears.²⁹

Most (89 percent) of the outstanding balance of accrued special charges was owed by four countries: Liberia, Peru, Sudan, and Zambia. Six other countries had smaller absolute amounts outstanding, but the charges were piling up and were becoming a significant factor causing each country’s arrears to rise rapidly. With the advent of the rights approach, this accumulation was becoming a potential bottleneck. For a country undertaking a RAP, a donor support group would be expected eventually to help the country settle its arrears so it could encash its rights and normalize its relationships with the Fund and other creditors. If donors had to cover the cost of repaying special charges on top of other arrears, the budgetary consequences could be substantial. Moreover, the burden sharing mechanisms for deferred charges (introduced after the system of special charges) already helped greatly to spread the burden across the whole membership.

In March 1991, the staff proposed suspending the imposition of special charges on any country implementing a RAP. Executive Directors generally liked the idea but thought it failed to go far enough. Tanya Sirivedhin (Alternate, Thailand) suggested abolishing the system of special charges altogether. Several other chairs supported her, but the winning idea came from Dawson, who noted the possibility of suspending special charges “could be used as a strong incentive for countries showing a high level of cooperation.”³⁰ The staff prepared a slightly broader proposal, under which special charges would be suspended for any country currently in protracted arrears, if it was implementing a RAP or other Fund-monitored program or if it was cooperating with the Fund and was making enough payments to keep its arrears from rising.³¹

Of the nine countries with protracted arrears in April 1991, five soon qualified under this broad policy. By April 1992, the Fund had suspended special charges for Panama, Peru, Sierra Leone, Vietnam, and Zambia. The difficulty remained, however, that the most intractable cases were continuing to be aggravated by the accumulation of high interest charges. As it became ever clearer that no one was gaining from this practice, the Fund took advantage of the next annual review of special charges to suspend them altogether for all outstanding cases. To retain their deterrent effect, they would still apply to any new cases, but for most practical purposes, the role of special charges in the Fund was brought to a close.³²

Guyana

The first country to benefit from the Fund’s new flexibility in the 1990s was the South American republic of Guyana. An IMF member since 1966, Guyana borrowed regularly from the Fund in the late 1970s and early 1980s in response to a weakening international market for sugar, its principal export crop. Low prices persisted for years, and from 1980 on, policy implementation and economic conditions deteriorated badly. That led the Fund to cancel an extended arrangement in 1982 and put further lending on hold. A year later, Guyana fell behind in its repayments, and its arrears accumulated for the next seven years (Figure 16.2).³³

Guyana: Use of Fund Credit, 1983–99

(In millions of SDRs, monthly data)

Source: The source for data presented in this and similar figures in this chapter is the IMF’s International Financial Statistics (IFS) database. “Total credit outstanding” includes purchases from the General Resources Account (GRA), except for reserve tranche purchases; loans from the Structural Adjustment Facility (SAF); loans from administered accounts, including the Trust Fund and the ESAF Trust; and any overdue obligations, including charges, interest, and fees. That last category includes overdue obligations to the SDR Department. This coverage is broader than “credit and loans outstanding” in IFS, which excludes charges, interest, fees, and all transactions in the SDR Department. Other labels in the figures refer to the facilities through which the loans were made.Note: ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Guyana: Use of Fund Credit, 1983–99

(In millions of SDRs, monthly data)

Source: The source for data presented in this and similar figures in this chapter is the IMF’s International Financial Statistics (IFS) database. “Total credit outstanding” includes purchases from the General Resources Account (GRA), except for reserve tranche purchases; loans from the Structural Adjustment Facility (SAF); loans from administered accounts, including the Trust Fund and the ESAF Trust; and any overdue obligations, including charges, interest, and fees. That last category includes overdue obligations to the SDR Department. This coverage is broader than “credit and loans outstanding” in IFS, which excludes charges, interest, fees, and all transactions in the SDR Department. Other labels in the figures refer to the facilities through which the loans were made.Note: ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Guyana: Use of Fund Credit, 1983–99

(In millions of SDRs, monthly data)

Source: The source for data presented in this and similar figures in this chapter is the IMF’s International Financial Statistics (IFS) database. “Total credit outstanding” includes purchases from the General Resources Account (GRA), except for reserve tranche purchases; loans from the Structural Adjustment Facility (SAF); loans from administered accounts, including the Trust Fund and the ESAF Trust; and any overdue obligations, including charges, interest, and fees. That last category includes overdue obligations to the SDR Department. This coverage is broader than “credit and loans outstanding” in IFS, which excludes charges, interest, fees, and all transactions in the SDR Department. Other labels in the figures refer to the facilities through which the loans were made.Note: ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

From the middle of 1988 through the first half of 1990, discussions between Guyana and the international community took place on two fronts. In Georgetown, the capital city, a staff team led by Carlos G. Muñiz (Advisor, Western Hemisphere Department) helped the authorities develop a comprehensive program of economic policies aimed at restoring financial viability under realistic assumptions about the future of the sugar market. Although the ultimate success of that program would require external financial support and therefore would require prior settlement of arrears, the intention was simply to establish a credible plan to be implemented more fully once the books were cleared. Separately, a group of friendly countries, led by Canada, formed a support group—chaired by Canada’s Executive Director in the IMF—to help Guyana clear its arrears once the authorities had made satisfactory initial progress on stabilizing their economic policies.

In April 1989, in the first application of the Fund’s new intensified collaborative approach, the Executive Board approved Guyana’s program as meeting the standards for financial support in the upper credit tranches. It also agreed to monitor implementation for a year, without making any financial commitment, to give the authorities time to reestablish credibility and restore some semblance of stability to the economy. At the same time, the Board endorsed the intention of the Managing Director to approve new loans to Guyana once the Fund-monitored program was completed.³⁴

Guyana completed the program successfully, and all the remaining elements came together quickly in the second quarter of 1990. The next crucial step was to pull together the money to repay the $140 million (SDR 107.1 million, or 218 percent of quota) Guyana owed to the IMF. Guyana itself had almost no resources it could afford to use for this purpose. The support group provided grants totaling $49.3 million, and the Bank for International Settlements and its member central banks provided a 90-day bridge loan of $178 million to help cover settlement of debts to the Fund and other multilateral lenders.³⁵ As a token gesture of good faith, Guyana used $600,000 of its own reserves to complete the repayment. On June 20, 1990, on the same day arrears were cleared, the Fund allowed a drawing of $53 million (SDR 39.7 million) on a new stand-by arrangement—which Guyana needed to help it repay the bridge loan—and disbursed an ESAF loan of $50 million (SDR 37.2 million).

For the next several years, Guyana continued to borrow—mostly on concessional terms through the ESAF—while its economy grew rapidly, and the government remained within its means to service these new debts. Beginning in 1998, economic performance slackened once more, but Guyana managed to avoid falling again into arrears.

Honduras

As in Guyana, world prices for Honduras’s export crops (coffee and bananas) remained weak throughout much of the 1980s. After 1983, however, Honduras managed to cover its financing needs elsewhere, while gradually repaying its earlier loans from the IMF. From October 1987, those payments to the Fund slowed, and overdue obligations began to accumulate (Figure 16.3). As long as the authorities continued to reduce the total amount outstanding, the Fund was reluctant to take any punitive action, but the situation worsened toward the end of 1988. As the date for presidential elections approached, President José Azcona’s government devoted its energies to domestic spending and adopted a populist stance opposing the repayment of foreign debts. With Honduras’s external arrears accumulating rapidly and no payments being made, in August 1989 the Fund declared Honduras to be ineligible to borrow (effective November 1).³⁶ In response, a defiant Azcona reportedly concluded, “What makes me sad is not to have stopped paying the [IMF] three years ago.”³⁷

Honduras: Use of Fund Credit, 1987–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Honduras: Use of Fund Credit, 1987–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Honduras: Use of Fund Credit, 1987–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

The problem did not last long. A new government took office in January 1990 and negotiated a new program with the Fund. On June 28, 1990, after obtaining a bridge loan from a support group led by the U.S. government, Honduras settled all of its overdue obligations to the Fund (approximately $36 million, which was less than 4 percent of annual exports). One month later, the Fund approved a 12-month standby arrangement for $41 million (SDR 30.5 million, or 45 percent of quota).

From that point on, Honduras stayed current with the IMF, though it continued to have trouble servicing its other debts to official as well as commercial creditors.³⁸ The 1990 stand-by arrangement was followed by a sizeable ($57 million) Compensatory Financing Facility drawing in February 1992 to cover a temporary shortfall in export volumes, and then by an ESAF arrangement that stretched eventually to five years, 1992–97. In response to Hurricane Mitch, which destroyed much of the country’s economy and killed thousands of people in October 1998, the Fund provided emergency disaster relief (see Chapter 5) and then approved a larger ESAF arrangement the following March.

Panama

The most overtly political case of arrears to the IMF in the 1980s was Panama’s. In 1987, the U.S. government began investigating the chief of Panama’s armed forces (and de facto political ruler), General Manuel Noriega, on a variety of criminal charges. That investigation, which was intensified in April 1988 with the imposition of financial sanctions, severely disrupted the country’s economic and financial activity. Panama, unable to access its dollar reserves, could not meet its payments to the Fund, and arrears accumulated rapidly (Figure 16.4). U.S. military forces invaded Panama in December 1989 and arrested Noriega, after which the previously elected president, Guillermo Endara Galimany, was restored to his position.³⁹

Panama: Use of Fund Credit, 1987–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; EFF = Extended Fund Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Panama: Use of Fund Credit, 1987–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; EFF = Extended Fund Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Panama: Use of Fund Credit, 1987–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; EFF = Extended Fund Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Panama’s international relations normalized fairly rapidly after this upheaval. In 1990, the new government began strengthening its economic policies in the framework of a staff-monitored program, while the U.S. government began organizing a support group of donor countries to help Panama clear its arrears to the Fund and other multilateral institutions. In September, the Executive Board approved the continuation of the economic program as a Fund-monitored (as opposed to staff-monitored) program, meaning satisfactory progress was being made and the program met the standards for Fund support in the upper credit tranches. At that time, the authorities in both Panama and the United States expected arrears to be cleared by the end of the year.⁴⁰ However, Panama took much longer to raise the money, and it cleared all of its arrears to the Fund and other official creditors only in February 1992.⁴¹ The Fund then resumed lending and approved both a 22-month stand-by arrangement and a CCFF drawing. This lending continued through the rest of the decade.

Peru

Peru’s arrears to the Fund dated from September 1985, when President Alan Garcí unilaterally declared a ceiling on payments on all external debts equivalent to 10 percent of the country’s earnings of foreign exchange. Because Peru had the resources to service its debts to the IMF but chose instead to limit its payments, the Fund reacted quickly by issuing a formal declaration in August 1986 that Peru was no longer eligible to use Fund resources.⁴²

The next three years were a standoff, during which Peru made only modest occasional payments to the Fund, while continuing to repay other creditors more inclined to promise new loans. As arrears accumulated (Figure 16.5), the Fund repeatedly declared Peru to be failing to meet its obligations under the Articles. Toward the end of 1989, however, the first signs of détente began to appear. The Fund by then had initiated its intensified collaborative approach to dealing with arrears cases. In Peru, the next presidential election—effectively a referendum on Garcia’s policies—was rapidly approaching. Both sides thus had reason to show new flexibility.

Panama: Use of Fund Credit, 1987–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: EFF = Extended Fund Facility.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Panama: Use of Fund Credit, 1987–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: EFF = Extended Fund Facility.

• Download Figure
• Download figure as PowerPoint slide

Panama: Use of Fund Credit, 1987–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: EFF = Extended Fund Facility.

• Download Figure
• Download figure as PowerPoint slide

In December 1989, Peru made a payment of some $43 million (SDR 32.8 million), which reduced its overdue obligations to the level outstanding at the end of August. The authorities also signaled they would now make regular payments to cover all amounts coming due. In other words, arrears would be held constant, and total outstanding obligations would gradually decline. In addition, they agreed to receive an IMF staff mission to hold Article IV consultation discussions and help them design a multiyear economic policy program.⁴³

The Fund responded positively to these modest but politically significant gestures by taking two similarly modest but significant actions. First, it postponed further consideration of issuing a declaration of noncooperation. Second, it agreed to provide technical assistance the government had requested to help it stabilize its finances.⁴⁴

In June 1990, voters elected Alberto Fujimori to succeed García as president of Peru. As part of a broad effort to stabilize the economy and resume economic growth, Fujimori set out to continue and accelerate the move, initiated by his predecessor, to normalize creditor relations. The international community responded enthusiastically. Japan and the United States convened a broad support group of donors that included nine European countries and Canada. Separately, four Latin American countries—Chile, Colombia, Mexico, and Venezuela—offered short-term bridging loans.⁴⁵ Once those pledges were in place, the IMF and other multilateral institutions arranged for Peru to settle its arrears and obtain new financing.

In March 1991, the Fund expressed its approval of the Fujimori government’s policies and declared they “could serve as the basis for a two-year Fund-monitored rights accumulation program for Peru, provided that the necessary financing assurances would be available.”⁴⁶ The reference to “financing assurances” meant that the support group would have to make its commitments first, and then the Fund would formally approve the onset of rights accumulation. That step was completed in September, and Peru became the second country (after Zambia; see below) to embark on a RAP.

Peru offers a clear picture of the way in which the RAP served to mobilize both policy reforms and international donor support and culminate in an effective rescheduling of outstanding obligations. When the Executive Board approved the arrangement, Peru had outstanding arrears totaling about $840 million (SDR 623 million). The two-year arrangement called for the Fund to make a conditional commitment to lend up to that amount to Peru. The actual disbursement would be made through a successor Extended Fund Facility arrangement commencing after the successful completion of the two-year program, but it would be heavily front-loaded so the initial disbursement would be roughly equivalent to the outstanding arrears. Meanwhile, the support group and possibly other donors would help finance the program throughout the period the RAP was in effect, and Peru would be expected to avoid any further accumulation of arrears.

In Peru’s case, the plan worked as expected, despite setbacks in donor support owing to concerns about political stability and the government’s worsening record on human rights.⁴⁷ Peru completed the RAP in March 1993, by which time it had accumulated the full amount of the Fund’s commitment. At that time, Japan and the United States advanced bridge loans so Peru could settle its arrears. Immediately afterward, the Executive Board approved a three-year Extended Fund Facility arrangement totaling $1.4 billion (SDR 1,018.1 million, or 218 percent of Peru’s quota). Almost $890 million (SDR 642.7 million) was disbursed right away, so Peru’s outstanding indebtedness was nearly constant (see Figure 16.5) but was made current with a new seven- to ten-year repayment schedule. The combination of strong economic policies and new official and commercial financing enabled Peru to forgo any further drawing on the Fund arrangement through 1996.⁴⁸

Cambodia: Use of Fund Credit, 1972–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CFF = Compensatory Financing Facility; ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; STF = Systemic Transformation Facility.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Cambodia: Use of Fund Credit, 1972–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CFF = Compensatory Financing Facility; ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; STF = Systemic Transformation Facility.

• Download Figure
• Download figure as PowerPoint slide

Cambodia: Use of Fund Credit, 1972–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CFF = Compensatory Financing Facility; ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; STF = Systemic Transformation Facility.

• Download Figure
• Download figure as PowerPoint slide

Cambodia

At the start of the 1990s, Cambodia had been in arrears on its payments to the IMF far longer than any other member country—ever since the Khmer Rouge temporarily took control of the country in April 1975 (Figure 16.6). Throughout the horrors and upheavals of the next 15 years, including 10 years of Vietnamese occupation, Cambodia lacked an internationally recognized government, and the IMF lacked any channel for official communication with the member.

The withdrawal of Vietnamese forces in 1989 did not immediately open an acceptable line of communication, but it did create an opportunity for incremental progress. The government-in-exile, then based in Thailand, was led by Prince Norodom Sihanouk, the former king who had ruled Cambodia for nearly three decades from 1941 to 1970. At this time, Sihanouk was receiving some support from the United States and was widely seen as the best hope for a return to normalcy. In June 1991, Sihanouk wrote to Camdessus to request the “readmission” of Cambodia into the IMF “as soon as possible.” Camdessus welcomed the initiative, but he responded noncommittally: “We are watching events in your country with great interest, and welcome the significant progress being made towards peace. We look forward to the emergence of a representative, national government and the normalization of relations with the Fund.”⁴⁹

The critical event enabling this normalization was the signing of a comprehensive peace treaty by all of the involved parties in Paris in October 1991, after which Sihanouk returned to Cambodia as head of state. Beginning in November, the United Nations (UN) and the Asian Development Bank organized a series of missions to Phnom Penh, in which Fund staff participated, to gather information about economic and political developments and offer technical assistance. Through this time, however, the Fund remained wary of dealing with a government that might not have the ability to control the economy.

The political balance in Cambodia in 1992 was delicately poised. The nominal government in Cambodia was still led by Hun Sen, who had been placed in office during the Vietnamese occupation. This government was not accepted internationally as legitimate, and under the terms of the Paris peace treaty it was under the control of the UN. The Supreme National Council (SNC), led by Sihanouk but also including representatives of the Khmer Rouge, was recognized but had no administrative control over the country. The SNC had authorized the Hun Sen government to act on its behalf as its “executive arm.” It was with this fragile structure that the international community was trying to work. Only after the IMF received written assurances on the viability of the government’s structure from the SNC and the UN Transitional Authority in Cambodia did the Fund agree to reestablish formal communications and take steps toward normalization and the settlement of arrears. That development occurred in October 1992.⁵⁰

After several fact-finding missions and the formal decision to normalize relations, a Fund team led by John R. Dodsworth (Division Chief, Central Asia Department) negotiated a reform and stabilization program to be monitored informally by the staff through 1993.⁵¹ That opened a pathway for the clearance of arrears. As the first step on that path, the IMF undertook a unique set of transactions made possible by the peculiar features of the long interlude in relations from 1975 to 1992. In the late 1970s, the Fund had restituted 25 million ounces of gold to its member countries and had sold another 25 million ounces at market prices to finance the original Trust Fund for lending to low-income countries on concessional terms. Because of the absence of a line of communication, the Fund had held Cambodia’s share of the proceeds on the member’s behalf, pending settlement of arrears. Now, in December 1992, the Fund and Cambodia agreed the Fund would restitute the gold to the country, simultaneously buy it back at the current market price, and apply the proceeds to the outstanding arrears.

In addition, the profits from the earlier gold sales would be applied to the partial settlement. Together, those transactions reduced Cambodia’s overdue obligations to $43 million from $52 million (to SDR 31.0 million from SDR 37.3 million).⁵²

To cover the rest of Cambodia’s arrears settlement, France and Japan assembled a support group of six countries willing to offer grants for this purpose. Once those grants were in hand and Cambodia had made sufficient progress in establishing control over its own finances, the authorities settled their arrears in total on October 1, 1993. Three days later, the Fund lifted the restrictions on Cambodia’s use of its resources and approved a $9 million (SDR 6.25 million) drawing under the terms of the STF. Subsequent drawings, as discussed in Chapter 12, were all on concessional terms, through the ESAF Trust.

Vietnam

Politics also played a major role in the rise and fall of Vietnam’s payments arrears to the IMF. The problem began in 1984, when the authorities grew frustrated with the Fund’s refusal to agree to provide new loans through a stand-by arrangement. Repayments were coming due on earlier loans the IMF had made from the Trust Fund and the General Resources Account (GRA). The authorities were anxious to reschedule those debts, but the Fund was unimpressed by their proposed economic policies. In addition, Vietnam’s occupation of Cambodia, in effect since 1978, was not conducive to good relations with the international community. Although Vietnam had sufficient gold reserves to continue servicing its obligations to the Fund, beginning in April 1984 the authorities decided it was no longer worthwhile to do so.⁵³

In the second half of the 1980s, Vietnam began to strengthen its economic policies, with remarkable success. As the Fund staff noted in 1991, this success was “all the more remarkable since it [was] achieved without the financial support from industrial countries and international organizations, in the face of the existence of [trade] embargoes, and despite the loss of substantial aid from” the rapidly disintegrating Soviet Union.⁵⁴ Indeed, cooperation with the Fund and the international community remained patchy. The authorities made occasional partial payments to the IMF, but arrears continued to accumulate (Figure 16.7). Despite the withdrawal of Vietnamese forces from Cambodia in 1989, the United States persisted with the trade embargo it had imposed during the war that had ended in 1975. By this time, the U.S. goal—driven by domestic politics—was primarily to force cooperation on efforts to identify the remains of missing U.S. personnel and to ensure Vietnam no longer held any prisoners of war. Other major countries, notably France and Japan, took a more positive view of economic and political developments in Vietnam, but U.S. opposition was strong enough to block a settlement.

Vietnam: Use of Fund Credit, 1983–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account;SBA = Stand-by arrangement; STF = Systemic Transformation Facility.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Vietnam: Use of Fund Credit, 1983–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account;SBA = Stand-by arrangement; STF = Systemic Transformation Facility.

• Download Figure
• Download figure as PowerPoint slide

Vietnam: Use of Fund Credit, 1983–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account;SBA = Stand-by arrangement; STF = Systemic Transformation Facility.

• Download Figure
• Download figure as PowerPoint slide

When the Executive Board met in December 1991 to conclude the Article IV consultation with Vietnam for that year, most Directors were eager to resolve the impasse.

The French and Japanese governments had assembled a group of donors prepared to finance the settlement of Vietnam’s arrears, and almost everyone agreed the country’s economic progress deserved international support. No one was prepared to move, however, until U.S. opposition softened.⁵⁵ At the Board meeting, while other Directors expressed at least lukewarm support, Quincy M. Krosby (Alternate, United States) complained about Vietnam’s “misplaced ambivalence about the virtues of market mechanisms and a lingering attachment to centralized control.” E.A. (Ted) Evans (Australia) showed his exasperation with that view by calling it “poorly informed.” In his view, Vietnam’s difficulties resulted “not because of a lack of effort on the part of the Vietnamese authorities, but because of the decision of the international community not to provide the financing that would allow Vietnam to adopt a comprehensive program.” In the end, Camdessus observed that there was “very broad—though not as yet unanimous—support to move forward in the normalization of Vietnam’s international financial relations,” and he promised the Vietnamese and the Board they could “count on my personal effort to this end.”⁵⁶

The change of U.S. administration that occurred in January 1993 allowed relations to improve. The Vietnamese government responded with a more welcoming attitude toward American efforts to find and identify the remains of missing personnel. Before the year was out, on October 5, 1993, Vietnam settled all of its arrears, and the IMF prepared to resume lending.⁵⁷

Vietnam’s arrears—to the GRA, the Trust Fund, and the SDR Department—totaled about $142 million (SDR 100.2 million). The nine countries in the support group provided grants totaling $55 million, and the rest was made possible by a bridge loan syndicated by agencies in France and Japan. On October 6, the IMF disbursed a $17 million (SDR 12.1 million) loan through the Systemic Transformation Facility (STF) and an $85 million initial drawing on a new stand-by arrangement. Those sums enabled Vietnam to repay the bridge loan.

The nearly simultaneous settlement of long-standing overdue obligations by both Cambodia and Vietnam in the first week of October 1993 signaled major progress in fulfillment of the IMF’s commitment to resolve the arrears crisis of the 1980s. To mark the occasion, Camdessus made his first-ever trip to the region, with stops in Phnom Penh, Hanoi, and Ho Chi Minh City. Both in private meetings with senior political leaders and in public forums, he hailed these developments not only for marking the normalization of international relations for the two neighboring countries but also for potentially enabling the beginning of a new era of prosperity.

For the next year, the Fund lent to Vietnam through the stand-by arrangement and a second STF loan. Lending then switched to the less costly ESAF. Total indebtedness peaked at the end of 1996, after which Vietnam was able to obtain sufficient financial assistance from Japan and other development aid sources and gradually repay the Fund.

Sierra Leone

Throughout much of the 1980s, Sierra Leone struggled to implement sound economic policies and stay current on its external debts. Those efforts faltered, however, and arrears continued to accumulate; the IMF declared the country ineligible for further borrowing in April 1988.⁵⁸ In the second half of 1989, Sierra Leone resumed making small payments, though not enough to keep arrears from rising (Figure 16.8). The authorities also entered into discussions with Fund staff with the aim of further strengthening policies. Although a few creditor countries, especially the United States, were skeptical of these moves, the Executive Board adopted a relatively relaxed posture aimed at encouraging the reformers within the government.⁵⁹

Sierra Leone: Use of Fund Credit, 1984–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: EPCA = Emergency Postconflict Assistance; ESAF = Enhanced Structural Adjustment Facility; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Sierra Leone: Use of Fund Credit, 1984–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: EPCA = Emergency Postconflict Assistance; ESAF = Enhanced Structural Adjustment Facility; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Sierra Leone: Use of Fund Credit, 1984–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: EPCA = Emergency Postconflict Assistance; ESAF = Enhanced Structural Adjustment Facility; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

The staff and the authorities met frequently in 1990 and 1991 to develop a program for the Fund to endorse and for donor countries to support. That effort culminated on April 3, 1992, when the Executive Board approved Sierra Leone as the third country (after Zambia and Peru) to have a RAP. The World Bank organized an informal support group of donor countries to coordinate financial assistance while Sierra Leone tried to carry out the Fund-monitored program. Unfortunately, during this same period the country was descending into a social and political abyss. A rebel group based in neighboring Liberia began an armed insurrection in March 1991, gradually taking control of more and more territory. As the government’s grip on power started to slip, a military coup overthrew the government in April 1992, just weeks after the IMF’s approval of the RAP.

The military government, constituted as the National Provisional Ruling Council, continued the civilian government’s policy of cooperating with the Fund and implementing the RAP. Despite the ongoing insurrection—linked to the Liberian outlaw, Charles Taylor, and employing increasingly brutal acts of terrorism—the authorities successfully completed the program in less than two years. With help from bridge loans provided by France, Norway, and the United States, Sierra Leone settled its arrears on March 28, 1994.

The $120 million Sierra Leone repaid in 1994 was mostly the principal and interest on stand-by arrangements from the 1980s, plus a relatively small amount from a 1986 Structural Adjustment Facility (SAF) loan. The imperative now was to switch to loans on concessional terms that would be less likely to drive the country back into an unsustainable debt burden. On the same day that Sierra Leone repaid its old loans, the Executive Board approved new loans through the SAF ($38 million available immediately) and the ESAF ($125million, of which $89 million was available immediately).

Much of the initial disbursement of these heavily front-loaded arrangements was used to repay the bridge loans. As is evident in Figure 16.8, this series of actions left Sierra Leone’s indebtedness virtually unchanged. The benefits were to reschedule the debt into a lower-cost and longer-maturity form, to put economic policies on a sustainable and positive path, and to establish the preconditions for a resumption of donor support.

For the rest of the 1990s, relations between Sierra Leone and the IMF proceeded smoothly, notwithstanding the horrors of the ongoing insurrection with which a series of governments had to cope.⁶⁰ The policies the Fund supported with a four-year ESAF arrangement were carried out successfully. In November 1998, as the insurrection finally was being brought under control, the Fund began providing emergency post-conflict assistance from its general resources. Those loans were repaid on schedule, and the Fund continued to assist the country through the Poverty Reduction and Growth Facility (the ESAF successor) in the following decade.

Zambia

The first country to be approved for a RAP, but the third and final one to complete the program in the 1990s, was Zambia. A collapse in the world copper market in the 1980s hit this copper-exporting country hard, and the government tried but ultimately failed to put in place a program of sustainable economic policies. As payments arrears accumulated, the Fund reluctantly but unavoidably declared Zambia ineligible for further borrowing in September 1987⁶¹.

After the declaration of ineligibility, Zambia shifted to more stringent policies, but decided initially to rely heavily on trade and exchange restrictions to strengthen the balance of payments. By late 1988, these controls were leading to widespread smuggling and other underground activity. Inflation rose sharply, as did the fiscal deficit. Zambia’s long-serving president, Kenneth Kaunda, then shifted gears again, aiming to promote stability and growth through more conventional means even if it meant taking draconian measures with major social consequences. In the first half of 1989, he tripled the price of maize (a diet staple that was in short domestic supply), introduced rationing coupons, cut the foreign exchange value of the currency in half, and lifted price controls on a wide range of consumer goods. The government negotiated a Policy Framework Paper with the Fund and the World Bank, which the institutions approved in September 1989 as a basis for new lending on concessional terms once arrears were cleared.⁶² In the meantime, however, Zambia’s arrears were continuing to pile up (Figure 16.9).

Zambia: Use of Fund Credit, 1986–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: EPCA = Emergency Postconflict Assistance; ESAF = Enhanced Structural Adjustment Facility; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Zambia: Use of Fund Credit, 1986–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: EPCA = Emergency Postconflict Assistance; ESAF = Enhanced Structural Adjustment Facility; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Zambia: Use of Fund Credit, 1986–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: EPCA = Emergency Postconflict Assistance; ESAF = Enhanced Structural Adjustment Facility; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

By the beginning of 1990, the staff (led by K. Burke Dillon, Assistant Director, African Department) and the authorities agreed on all of the policy elements for a Fund-monitored program. Potential donor countries formed a Consultative Group, and the Paris Club agreed to consider rescheduling some bilateral debts. Despite the continuation of arrears, the IMF resumed providing technical assistance, and it reopened the Resident Representative office in Lusaka, which had been vacant since 1987. In the absence of new external finance, however, domestic opposition to Kaunda’s policy initiatives began to swell. Deadly riots broke out in June 1990, sparked mainly by the sharp increases in food prices.

Progress continued, but in fits and starts. Almost immediately after the Executive Board approved the operational terms of the rights approach, it agreed in principle to accept Zambia as the first country to qualify for a RAP. The policy framework was already in place, and the formation of the Consultative Group gave some assurance that the program could be adequately financed without an injection of cash from the IMF. Formal approval of the RAP, however, was delayed until April 1991, shortly after Zambia cleared its arrears with the World Bank. That settlement made Zambia eligible for financial assistance both from donors and from the World Bank’s Special Program of Assistance for Africa. That financing assurance made it possible, in turn, for the Fund to make its own forward commitment through the RAP.⁶³

As the economy continued to weaken under the weight of a severe drought that decimated maize output, domestic unrest continued to build against the government. In response, Kaunda—Zambia’s only president since independence in 1964—decided to restore multiparty democracy and open discussions that would produce a new constitution. Unfortunately for him, he and his party lost the elections, and a new government under Frederick Chiluba took office in November 1991. In the meantime, policy implementation slipped badly during the election season, and Zambia’s payments to the Fund fell short of the targets required under the RAP. In October 1991—four weeks before the elections—the Executive Board expressed its “deep regrets” and disappointment at the slippages and declined to approve any accumulation of rights.⁶⁴

Once Chiluba was in office and had put new policies in place, the authorities and the IMF agreed to scrap the original RAP and replace it with a new program that would run through 1995. From that point on, progress was steadier and more evident, though still slow. The Fund granted a number of waivers in 1993 and 1994 and extended the time limit on several occasions in 1995 to keep the program alive and allow Zambia to keep accumulating rights. Finally, in December 1995, all elements came together and Zambia successfully completed the program.

On December 6, 1995, the Executive Board made several decisions that helped normalize relations. It took note of Zambia’s repayment of all overdue obligations, totaling more than $1.2 billion (SDR 830.2 million), which had been temporarily financed by single-day bridge loans from 11 donor countries. It lifted the ban on new loans to Zambia. It approved a one-year SAF arrangement and a three-year ESAF arrangement, and it approved immediate disbursement of almost all of that commitment as a way of encashing the rights Zambia had accumulated since 1992. At the end of the day, Zambia had no remaining obligations to the Fund’s general resources,⁶⁵ it was able to repay all of the bridge loans, and its new loans from the Fund (totaling SDR 833.4 million) were all on concessional terms and would not fall due for several more years.⁶⁶

These large up-front transactions—the largest single use of the IMF’s concessional resources in the 1990s—made some donors to the ESAF Trust nervous. At the Board meeting to complete the RAP, Hachiro Mesaki (Japan) worried about Zambia’s “unsatisfactory track record” and the consequent “extremely high” risk being shouldered by the creditors of the ESAF Trust. The Fund had pledged the use of up to 3 million ounces of gold (worth about $400 million at then-current prices) to cover that risk, but Mesaki found it “questionable whether 3 million ounces is sufficient to cover the increased risk.” A few other creditors supported him, but the Board as a whole was willing to set those concerns aside, give Zambia the benefit of the doubt, and declare the strengthened arrears strategy to be a success.⁶⁷

Liberia

The IMF lent heavily to Liberia in 1980–84, as the United States and other major creditors eagerly supported the government’s attempts to recover from the social and economic instability of the previous decade. Disillusionment set in on all sides at the end of that period. Liberia stopped paying the Fund right after the Executive Board approved a new stand-by arrangement; the United States canceled a planned grant to the government; and the Fund stopped disbursing on the arrangement.⁶⁸ For the next several years, until 1990, Liberia made a number of small payments, but far less than the amounts coming due. By 1990, almost all of Liberia’s debt to the Fund was overdue (Figure 16.10), and prospects for servicing it were being threatened by a civil conflict that would continue throughout the rest of the decade and beyond.

An insurrection against the Liberian government began in December 1989, led by Charles Taylor, a vagabond warrior who was a fugitive from U.S. justice and was under Libyan patronage. Taylor’s forces quickly took control of most of the country except for the capital, Monrovia. While this assault was under way, an IMF mission tried to carry on discussions as usual in Monrovia. The result bordered on the surreal, as the staff reported to headquarters that “ongoing rebel activity in the north of the country … had reportedly distracted senior officials from focusing on economic policy matters.” The staff also complained that the government had just purchased a jet airplane it could ill afford, and it was negotiating to settle arrears with the African Development Bank while making only token payments to the Fund. For those and other reasons, the staff concluded, “Liberia cannot be considered as actively cooperating with the Fund toward resolving the problem of its arrears to the Fund.”⁶⁹

From the Fund’s perspective, the salient point was not that the authorities were unable to act in the middle of a political and military crisis, but rather that they had failed to act responsibly for more than five years. The March 1990 review was the tenth consecutive semiannual review of Liberia’s arrears, and the Executive Board had little patience left. At the Board meeting, the decision to issue the Fund’s first-ever “declaration of noncooperation” was a foregone conclusion. The only real controversy was its wording. The staff proposed stressing that the declaration was but one stage in an escalating series of measures the Fund might take. Specifically, the final paragraph of the draft decision noted that the Board would hold another review by the end of August 1990. “In the event that Liberia has not resumed active cooperation with the Fund …, the Fund will give consideration at that time to the initiation of procedures leading to the compulsory withdrawal of Liberia from the Fund.”⁷⁰

A few Directors were squeamish about making this threat in a public declaration. As a message to the authorities, its purpose was clear enough. Whether the threat should be made public was another matter. On that reasoning, Markus Fogelholm (Finland) proposed deleting from the public declaration any reference to compulsory withdrawal. Ultimately, however, a majority of the Board preferred to adhere to the staff proposal.⁷¹

Before the Fund could conduct a further review and initiate procedures leading to expulsion, the security situation in Liberia worsened dramatically. Taylor’s rebel forces soon reached Monrovia, at which point they captured, tortured, and assassinated President Samuel Doe. A breakaway rebel faction then challenged Taylor, and the two forces settled into a devastating civil war that left Liberia in anarchy for several years. In those circumstances, the Fund had no choice but to put consideration of further measures on hold until a government could be formed and establish relations with the international community.⁷²

Sudan

Sudan fell behind in its repayments to the IMF in 1984, continued to pile up overdue obligations for another decade, and stayed in arrears for more than a quarter-century. The origins of the problem, as detailed in Boughton (2001, pp. 777–83), were economic, but the perpetuation was political. Throughout much of the 1970s, Sudan enjoyed ready access to loans from major international banks eager to help finance cotton exports and the exploitation of major petroleum reserves. As the cotton sector weakened in response to a sustained drop in world prices and domestic inefficiency, banks began pulling out their investments. The IMF stepped in with a series of loan programs from 1978 through 1984. That rescue effort appeared to be working until civil war erupted in 1984 and culminated in a coup d’état the following year. Attempts by IMF management and donor countries to negotiate a solution to the arrears problems with the new government eventually broke down, and in February 1986 the Executive Board declared Sudan ineligible to use Fund resources.

No progress was made over the next three years, despite occasional agreements on policy adjustments. The Fund maintained a resident office in Khartoum and regularly sent staff missions, but agreement on policies was elusive. Sudan made occasional payments to the Fund that were just a small percentage of amounts falling due, while it continued to service obligations fully to the World Bank and other creditors. The authorities insisted they were trying to cooperate while confronting terrible economic circumstances. Their payments to other creditors were necessary to preserve a flow of food and other essential imports. The World Bank, they noted, was providing net new loans in exchange for the repayment of earlier credits, while the Fund was making no such promises.⁷³ Although most of the Fund’s Executive Directors empathized with the immense challenges Sudan faced, including prolonged droughts and a devastating civil war, they concluded that the fundamental problem was still the government’s failure to carry out adequate economic policy reforms.

The strengthened arrears strategy adopted in July 1989 gave the Fund new leverage with which to try to pull or push the authorities into a more productive and cooperative stance. The policy dialogue and the promise of technical assistance were the carrots. If they failed to induce the desired response, the remedial sticks would come into play. By mid-1990, the Fund was convinced Sudan was not responding adequately, and it prepared to take further action against the country.

In July 1990, Camdessus proposed that the Fund should declare publicly that Sudan was not cooperating. As described above, the Fund had made such a declaration only once before, with regard to Liberia. In this case, the Executive Board was hesitant to act because many Directors thought Sudan was genuinely trying but lacked the resources to do more. After several hours of debate, the Board agreed to give the authorities two more months to improve policies and increase the flow of payments to the Fund. In September, after a further staff mission concluded the situation was not going to improve, the Fund issued its second declaration of noncooperation. In contrast to the declaration on Liberia, however, the Board softened the message a bit by pointedly omitting any reference to this being a step toward compulsory withdrawal. Instead, the declaration noted only that if Sudan did not resume “active cooperation …, the Fund will give consideration to the initiation of further procedures in accordance with the strengthened arrears strategy within nine months of the date of this decision.”⁷⁴

During the next two years, relations between Sudan and the Fund gradually improved. By the middle of 1992, economic conditions were on much more solid footing (good output growth driven by favorable agricultural conditions; moderate price inflation), and macroeconomic policies appeared to be sustainable. In response, the Fund was monitoring policy implementation and was open to considering a RAP if Sudan would agree to avoid any further accumulation of arrears.⁷⁵ That requirement, though, was becoming much harder to meet. Sudan now owed the Fund more than $1.5 billion, all of which was in arrears (Figure 16.11). Annual interest and related charges were expected to total more than $60 million a year, or about 20 percent of Sudan’s total export earnings. Moreover, Sudan had about $11 billion in other external debt also in arrears. Sudan simply could not service these debts and avoid further accumulation of arrears without substantial and continuing aid from donor countries.

Sudan: Use of Fund Credit, 1984–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Sudan: Use of Fund Credit, 1984–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Sudan: Use of Fund Credit, 1984–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Donors were totally disillusioned with Sudan. The military government in Khartoum, led by General Umar al-Bashir, was employing increasingly harsh tactics to try to win the civil war and impose control over the whole country. Bashir’s stated support for Iraq’s invasion of Kuwait in 1990 further alienated the regime from the international community. As a result, one country after another sharply reduced aid, and by late 1992 Sudan was receiving only enough assistance to cover the population’s most basic food requirements. Until a measure of political respectability could be restored, no resumption of donor support could be expected. Without donor support, Sudan had no hope of normalizing its relations with the IMF.

In the first half of 1993, Sudan’s payments to the Fund slowed to a trickle, and implementation of economic policies worsened. As the staff-monitored program lapsed, management began considering further actions. The adoption of the Third Amendment in November 1992 made it possible to take some additional intermediate steps without rushing too rapidly toward the ultimate step of expelling the country from Fund membership. In particular, the member’s voting rights could be suspended if the Fund determined the authorities had been failing to cooperate over an extended period. The Managing Director issued a complaint to that effect in June 1993, and in August the Board took the strongest action it had yet taken in a case of protracted arrears.

The Board meeting of August 6, 1993, was an extraordinary occasion. Both the minister of finance and the central bank governor came from Sudan to plead for sympathy and understanding and to state unequivocally their desire to cooperate and remain in good standing with the Fund. Directors were moved by the suffering of the Sudanese people, but most were convinced the solution rested with the authorities in Khartoum, not with the international community. The decision to suspend Sudan’s voting rights did not, however, come easily. Several chairs expressed their reluctance and regret, and some noted dissent within their own constituencies. Four chairs—the constituencies led by Egypt and the Islamic Republic of Iran, and both of the sub-Saharan African groups—voted against the proposed decision, and three others—China, France, and the Russian Federation—abstained. Suspension required approval of 70 percent of the voting power, and passage hung in the balance until the very end of the meeting. The Executive Director for India, K.P. Geethakrishnan, tried to muster a simple majority for postponing a decision until another staff mission could reassess prospects for an improvement. When that effort failed, he “very reluctantly supported the proposed decision.” With that, the proposal was adopted with 71.6 percent in favor.⁷⁶

For the next several months, little progress was evident. In April 1994, the Managing Director issued a further complaint that Sudan had “persisted in its failure to fulfill its obligations under the Articles of Agreement.” As the Board prepared to consider that complaint and initiate procedures that would lead eventually to the expulsion of Sudan, the Bashir government committed itself to do whatever was required to truncate that process. At the end of April, at the request of the authorities, the Fund sent Paul Chabrier (Director, Middle Eastern Department) and a few other staff to Khartoum. That visit led to an agreement by the authorities to increase their payments to the Fund substantially, to stabilize and begin to reduce the total balance outstanding.⁷⁷ Doing so took several more months, but Sudan’s arrears finally peaked in November, after which they declined very slowly (see Figure 16.11). In January 1995, as a gesture of détente, the Fund resumed providing technical assistance to Sudan.

Despite this renewed cooperation, the Fund applied further pressure in 1996. Although Sudan had continued making payments, the timing had become sporadic. Policy implementation was similarly spotty. The best that could be expected at this point was for the stock of outstanding obligations to creep down very gradually. Accordingly, the staff concluded Sudan “has not strengthened cooperation with the Fund in seeking a solution to the problem of its overdue financial obligations to the Fund,” and the Managing Director asked the Executive Board to consider compelling the member to withdraw.

The Board discussed the matter in February 1996, but Directors were deeply divided between those who wanted to give a positive response to Sudan’s modest but encouraging efforts and those who wanted to send a strong signal that protracted arrears would not be tolerated. Stanley Fischer (First Deputy Managing Director), who was chairing the meeting, reminded the Board its options were actually limited. If the Board recommended expelling Sudan but the Board of Governors failed to approve it by the required 85 percent majority, the Fund’s credibility and effectiveness could suffer. Moreover, if the Fund did expel Sudan, it would lose any chance of recovering the outstanding balances, and the whole membership would pay a heavy price. After much debate, the Board agreed unanimously to state “that it would expect to recommend that … the Board of Governors require Sudan to withdraw from the Fund unless the Executive Board determines by August 2, 1996 that Sudan has strengthened its cooperation with the Fund.” Thus, the Fund put Sudan on notice that it had just six months to make substantial progress.⁷⁸

Sudan made considerable efforts to improve its economic performance and whittle away at the arrears. Beginning in 1997, the Fund responded by providing technical assistance and monitoring policy implementation. After two years during which Sudan managed to reduce its outstanding arrears slowly but steadily, the Fund agreed to begin de-escalating its remedial measures. The United States objected strongly because it considered Sudan’s economic policies inadequate and its record of payments to the Fund weak. De-escalation, in the view of the U.S. chair, was “ill-advised.” The United States therefore voted against easing up on Sudan, but it received no support from other Executive Directors. As Stephen Collins (Alternate, United Kingdom) remarked, “this cooperative strategy is sort of a carrot and stick, and I think more of the carrot is appropriate in this case, within limits.”⁷⁹

Eliminating Sudan’s huge arrears was impossible as long as Sudan remained politically isolated from the international community, but the Fund recognized the need to reward the authorities’ efforts to cooperate. On August 27, 1999, the Board terminated the declaration of noncooperation and established a plan to restore the country’s voting rights the following year.

Somalia

The IMF lent heavily to Somalia in the early 1980s. The country’s policies were reasonably sound then, but external shocks were battering its economy. Even though the authorities fell behind in servicing their debts several times through the middle of the decade, the Fund kept lending until 1987 out of a conviction the government—besieged by an insurgency as well as by economic shocks—deserved international support. Performance then deteriorated rapidly, and from July 1987 Somalia was no longer able to keep up with the repayment schedule. In May 1988, the Fund declared Somalia ineligible for further borrowing (Boughton, 2001, pp. 795–98).

For the next two years, the authorities worked diligently with the staffs of the IMF and the World Bank to prepare a Policy Framework Paper. That effort succeeded and put Somalia in position for new loans if it could obtain the resources to settle its arrears. The Italian government formed a donors’ support group, and for a brief moment Somalia’s prospects seemed to be brightening. Tragically, by 1990 the country’s persistent economic stagnation was resulting in political chaos as a variety of warlords began staking claim to territories around the country. When the IMF Executive Board met in October 1990 to review Somalia’s overdue obligations, the government was rapidly losing control. Although Somalia had—almost miraculously, considering the circumstances—paid $1.35 million to the Fund since the previous review, that amount was not nearly enough to stabilize arrears (Figure 16.12). Because the authorities were making an effort but were unable to deliver either on payments to the Fund or on policy implementation, the Fund sought to find an appropriate middle ground in its response. The Board decision referred to “the absence of Somalia’s active cooperation with the Fund,” but it postponed a decision on issuing a formal declaration of noncooperation.⁸⁰

Somalia: Use of Fund Credit, 1984–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; GRA = General Resources Account; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Somalia: Use of Fund Credit, 1984–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; GRA = General Resources Account; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Somalia: Use of Fund Credit, 1984–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; GRA = General Resources Account; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

That was the last review of Somalia’s arrears for many years. Rebel forces overthrew the government in January 1991 but were unable to establish an effective replacement. From that point on, Somalia had no recognized authority with whom the IMF could communicate.⁸¹ All further remedial actions were put on hold.

The Dominican Republic

As discussed in Chapter 9, the Dominican Republic suffered a debt crisis in 1989 that led it to suspend payments to the IMF and other creditors. The authorities continued to work with Fund staff to try to resolve the problem, so neither management nor the Executive Board wanted to force the issue by taking a strong position. This cooperation resulted in a settlement of overdue obligations in August 1990, but the country missed the next payment and began rebuilding arrears (Figure 16.13).

Dominican Republic: Use of Fund Credit, 1989–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Dominican Republic: Use of Fund Credit, 1989–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Dominican Republic: Use of Fund Credit, 1989–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: CCFF = Compensatory and Contingency Financing Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

By any reasonable standard, the Dominican Republic—a small island economy, vulnerable to external shocks, and with an income level on the border between low-and middle-income classification—was making a strong effort to stay current on its debt service. Its payments to the Fund were steadily reducing the total outstanding, though not adequately to keep up with the required schedule. The authorities were working with the staff, led by Claudio Loser (Deputy Director, Western Hemisphere Department), to develop an acceptable policy program for the coming year. Nonetheless, the prospect of a new wave of arrears cases worried many of the Fund’s major creditor countries, and they were determined to take a firm stand to bring early closure to this one.

Camdessus preferred to focus on the positive steps the Dominican Republic was taking, to make it easier for the authorities to maintain domestic political support for servicing external debt. He issued a standard complaint to the Executive Board under the Fund’s Rule K-1, which would lead to a Fund decision formally suspending disbursements until the country was current on its repayments. He declined, however, to initiate a move to declare the country ineligible to use Fund resources.⁸³ He also advised against sending a letter to IMF Governors alerting them to these developments. Just a few months earlier, the Fund had adopted a new policy to send such letters (see above, p. 806). However, the Managing Director concluded in this case that the letter could create a “negative perception” of the Dominican Republic among potential donors and that it could undermine the “good prospects for an agreement” to settle arrears, strengthen economic policies, and lay the groundwork for new lending by the IMF.⁸⁴

The Executive Board overruled Camdessus and insisted he write to Governors and inform them of the Dominican Republic’s arrears to the Fund. Seven chairs, representing all of the Group of Seven (G7) countries except France, plus the Netherlands, spoke in favor of taking this action. The Dean of the Executive Board, Alexandre Kafka (Brazil), supported the Managing Director, as did the French and Mexican chairs. Other Directors were silent, and the Secretary declared the creditor group to have the majority.⁸⁵ Camdessus promptly sent the required letter, couched in the mildest possible terms, to a select group of potential donors or supporters. It read, in part,

While the Executive Board recognizes the Dominican Republic’s recent efforts, it views with concern this emergence of a new case of arrears to the Fund. Executive Directors stressed that further actions by the Dominican Republic are necessary to adopt appropriate policies and to settle the overdue obligations to the Fund. They also emphasized that the international community should stand ready to provide support for such efforts. In that spirit, I would greatly appreciate any assistance [your country] … may be able to provide in encouraging and facilitating the efforts of the Dominican Republic to adopt a suitable adjustment program and to effect full and prompt settlement of its overdue financial obligations to the Fund. I have no doubt that your Government will support the Dominican Republic in its efforts in these respects.⁸⁶

For the next few months, the authorities and the Fund staff continued to negotiate a new policy program the Fund could support. Along with other multilateral agencies, they also tried to solicit financial support from donor countries to help settle arrears. Although the program negotiations eventually succeeded, the fundraising effort largely failed. In February 1991, the European Commission released a previously scheduled grant of approximately $120 million for budgetary support, but no country came forward with an offer to help settle arrears to the Fund. Despite this cold shoulder, the Dominican Republic used its own available resources to settle its $33 million in arrears in March and April. The Fund then approved new loans, which were drawn and repaid on schedule.

Haiti

Haiti—the poorest country in the western hemisphere, sharing the island of Hispaniola with the Dominican Republic—suffered a series of political upheavals in the 1980s and 1990s that dragged its economy down even further. From 1957 to 1986, the country was ruled by a dictatorial regime led first by François Duvalier and then by his son, Jean-Claude Duvalier (“Papa Doc” and “Baby Doc” in the popular press). Throughout that time, the IMF provided relatively small but regular financial support: 20 annual stand-by arrangements and one three-year extended arrangement, plus a series of Trust Fund loans and Compensatory Financing Facility drawings. The amounts outstanding were always manageable, peaking in 1984 at $109 million (SDR 103.3 million, or 248 percent of quota), and were repaid on time. The popular overthrow of Jean-Claude Duvalier in February 1986, brought on by the regime’s increasingly brutal suppression of human rights and its inability to manage the economy, ended this fragile equilibrium.

Haiti: Use of Fund Credit, 1986–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Haiti: Use of Fund Credit, 1986–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Haiti: Use of Fund Credit, 1986–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: ESAF = Enhanced Structural Adjustment Facility; GRA = General Resources Account; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Initially, the IMF responded positively to Haiti’s attempts to establish democracy and restart economic growth. The Executive Board approved a $25 million SAF arrangement in December 1986 and disbursed $10.6 million immediately. Over the next few years, however, the provisional governments that succeeded to power struggled to maintain enough international support to preserve fiscal balance while providing a minimum of social services to the people. They also struggled to keep up with the schedule for servicing their outstanding debts to the IMF and other creditors. In July 1988, the Managing Director notified Directors that a “curtailment of external aid flows” against “a background of political uncertainty” had made it difficult for Haiti to meet its financial obligations. Until recently, the authorities had been able to keep the delay in paying the Fund to less than a month, but now the slippage was increasing. The Board was generally sympathetic, and the Fund postponed taking any action. Haiti settled its arrears in October, and the Managing Director withdrew the complaint.⁸⁷

Progress was short-lived. Haiti immediately missed the next payment and was in arrears for the next year. Once again, however, the government settled its accounts. In September 1989, the Fund approved a $26 million stand-by arrangement (SDR 21 million, or 47 percent of quota) and disbursed more than half of that amount at once. Haiti thus did not have to make any net payment to the Fund (Figure 16.14).

Delays began again in 1990. Meanwhile, Haiti moved toward democratic reform, holding its first free elections that year. Jean-Bertrand Aristide was elected president. He took office in February 1991 but was overthrown in a military coup in September. Political and economic chaos then overtook Haiti. In an effort to force the military to return power to the democratically elected government, the Organization of American States (OAS) imposed a trade embargo and blocked the transfer of Haitian financial assets held abroad (mostly in the United States). Although the military government told the IMF it was willing to service its debts, it obviously could not do so without first regaining access to its foreign exchange reserves. The next payments to the Fund were due in November 1991. Those payments were not made, nor were the ones that should have followed. The Managing Director responded in January 1992 by issuing a second formal complaint.⁸⁸

Although the horrendous economic and social conditions in Haiti would have been enough justification for the country’s external debt crisis, a more fundamentally political problem arose in 1991. The international community, working through the UN as well as the OAS, was determined to apply pressure on several fronts to resolve the political crisis, which meant restoring Aristide to power. As Dawson (United States) put it in September 1992, it “was the strong view of [the U.S.] authorities, and of the authorities of most countries represented in the Executive Board, that the Aristide Government was, indeed, the legitimate Government of Haiti.”⁸⁹ At that time, in anticipation of the IMF/World Bank Annual Meetings, both the military government in Port au Prince and the Aristide government-in-exile had submitted credentials and requested to be represented at the meetings. The agencies referred the matter to the Annual Meetings Chairman, who in turn referred it to the Joint Procedures Committee, a broadly representative group of Governors that convenes as necessary to advise the Chairman. The committee recommended, and the Chairman agreed, not to seat the delegation nominated by the military government and instead to seat the delegation representing the government-in-exile headed by Aristide. Shortly afterward, the Executive Board also decided to deal only with the Aristide government.⁹⁰ That government, as everyone clearly understood, had no resources of its own to service the country’s debts.

With these peculiar circumstances in mind, the Fund declined to take further remedial actions against Haiti. Instead, it simply waited until the political stalemate could be resolved. In September 1994, a multinational military force, led by U.S. troops and acting on a resolution of the UN Security Council, entered Haiti to restore order and return Aristide to power. With that step completed, the settlement of arrears to the Fund and other external creditors proceeded apace. The U.S. government formed a support group of nine major donor countries that provided grants totaling $643 million to enable Aristide to put the country’s external accounts in order. That settlement included a payment of $36 million to the Fund, which cleared all overdue obligations.

Political instability and economic stagnation soon returned. The Fund approved a front-loaded stand-by arrangement (the twenty-second for Haiti) in February 1995 but allowed only the initial drawing and one more. An ESAF arrangement followed in 1996 but again only the first disbursement was allowed owing to a weakening of policies and a shortfall in bilateral aid inflows. The only other Fund lending in the 1990s occurred in December 1998, in the form of emergency disaster relief following a major hurricane. Nonetheless, Haiti managed to meet its repayment obligations on time.

Yugoslavia

The Socialist Federal Republic of Yugoslavia disintegrated in 1990–92, as longstanding economic weaknesses led to and were in turn reinforced by political division. The IMF, which had lent regularly to Yugoslavia throughout the 1980s, made one last attempt to support the government’s stabilization efforts by approving a stand-by arrangement in March 1990. The initial drawing on that arrangement raised Yugoslavia’s indebtedness to the Fund to some $686 million (SDR 527.6 million, or 86 percent of quota). As the economic and social fabric of the country began to dissolve, the Fund put further disbursements on hold. In September 1992, as the last vestiges of political cohesion were vanishing, Yugoslavia began to accumulate arrears to the Fund.

The five initial successor states—Bosnia and Herzegovina, Croatia, the Federal Republic of Yugoslavia (Serbia and Montenegro), the former Yugoslav Republic (FYR) of Macedonia, and Slovenia—each inherited a share of the federation’s quota, assets, and liabilities in the IMF, including the outstanding obligations in arrears. At the end of 1992, Yugoslavia’s indebtedness to the Fund amounted to about $215 million, of which some $65 million was in arrears.

As explained in Chapter 2, the Fund responded to the uniqueness of this situation by making several ad hoc decisions regarding the conditions for the successor states to accede to Fund membership. In particular, each state had to settle its share of Yugoslavia’s arrears before it could become a member. Once it completed that step and the other requirements, it would be considered to have been a member without interruption since December 14, 1992, and to have continued, for its share, the membership of Yugoslavia in the Fund. That legal formality ensured that Yugoslavia’s assets and liabilities in the Fund would have clear and continuous ownership.

Three of the successor states—Croatia, FYR Macedonia, and Slovenia—cleared arrears and succeeded to their shares of the Yugoslav membership within a few months. The other two—Bosnia and Herzegovina, and Serbia and Montenegro—were embroiled in conflicts and were placed under international sanctions. They therefore were not able to clear their arrears to the Fund until much later. Bosnia and Herzegovina cleared its arrears in December 1995 with the help of a bridging loan from the Netherlands Central Bank, shortly after the Dayton peace accords ended the interethnic war in the country (see Figure 6.3). Serbia and Montenegro completed the settlement of the former federation’s arrears five years later, using the proceeds of bridge loans from Norway and Switzerland.

The Central African Republic

As discussed in Chapter 14, the CFA franc zone in central and west Africa experienced extensive economic setbacks throughout the late 1980s and early 1990s. The international effort to help resolve those difficulties culminated in a devaluation of the common currency in January 1994, accompanied by the adoption of comprehensive economic stabilization and reform plans in each of the participating countries. The IMF supported that effort with technical assistance and new lending. Several countries in the franc zone experienced temporary delays in meeting their financial obligations to the Fund, both before and after the 1994 devaluation, but only the Central African Republic developed protracted arrears.

As is evident in Figure 16.15, the Central African Republic’s arrears were small in relation to total credit outstanding, but they recurred frequently. From 1989 to 1998, the authorities fell behind in their payments on eight separate occasions, but they were able to get caught up in less than six months with just one exception. The Managing Director issued a complaint in 1989 and again in 1993. Only in 1993–94 did the problem threaten to get out of hand. In that case, however, by the time the six-month threshold was reached, the Fund was on the verge of negotiating the devaluation that would trigger large-scale donor support as well as new lending by the Fund and other multilateral agencies. In a December 1993 review, the Executive Board decided to postpone further action for three months, by which time the country cleared its arrears.

Central African Republic: Use of Fund Credit, 1989–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: ESAF = Enhanced Structural Adjustment Facility; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Central African Republic: Use of Fund Credit, 1989–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: ESAF = Enhanced Structural Adjustment Facility; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Central African Republic: Use of Fund Credit, 1989–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: ESAF = Enhanced Structural Adjustment Facility; SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Finally, two cases of arrears arose in the 1990s, remained outstanding at the end of the decade, and were settled a few years later.

The Democratic Republic of the Congo

The history of relations between the IMF and the Democratic Republic of the Congo is an unhappy one and has been so throughout an unusually long period. From the mid-1970s through the 1980s, the Fund lent regularly to Zaïre, as the country was then known, despite realizing that the country’s people were likely to benefit little from the proceeds. President Mobutu Sese Seko and his associates were notoriously corrupt, but the Fund tried to avoid being drawn into political judgments regarding a government that enjoyed widespread international support. Occasional efforts by management and the staff to limit the damage were unsuccessful. Zaïre’s indebtedness to the Fund rose to a peak of some $875 million in 1986 before tapering off. By 1988, Mobutu came to resent that he had to make net repayments to the Fund, especially because he was under pressure at home to keep up a semblance of economic growth in the face of massive inefficiency in the management of the economy. For about a year, Zaïre deliberately fell behind in those repayments, before settling up in May 1989 (Figure 16.16).⁹¹

Democratic Republic of the Congo: Use of Fund Credit, 1988–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Democratic Republic of the Congo: Use of Fund Credit, 1988–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

Democratic Republic of the Congo: Use of Fund Credit, 1988–99

(In millions of SDRs, monthly data)

Source: International Financial Statistics; see Figure 16.2 for further explanation.Note: SAF = Structural Adjustment Facility; SBA = Stand-by arrangement.

• Download Figure
• Download figure as PowerPoint slide

In November 1990, Zaïre again went into arrears to the Fund, and this time no imminent repayment was in sight. Mobutu’s grip on power was slipping because he was less and less able to keep up the system of patronage that had made that power possible. His international support was also waning, partly because of the breakdown in social order caused by the government’s inability even to pay wages regularly and partly because the end of the Cold War rendered him less useful to European and American patrons. Mobutu’s incentive to meet his external financial obligations simply disappeared.

The Fund responded forcefully to Zaïre’s unwillingness to repay its loans. In September 1991, the Executive Board declared Zaïre to be ineligible to use Fund resources. Five months later, it issued a public declaration of noncooperation. At the time, an international coalition led by Belgium, France, and the United States was pressing Mobutu to resolve the domestic political stalemate and form a broadly based coalition government. In the absence of such a solution, the economy was no longer functioning. At the Executive Board meeting, only the French Director (Jean-Pierre Landau) and the two Directors from sub-Saharan Africa (L.B. Monyake, from Lesotho, and Corentino V. Santos, from Cape Verde) argued for a delay in declaring Zaïre not to be cooperating, to give the democratization process more time to succeed. Even the Belgian chair supported the staff proposal. Mobutu had few friends left in the world.⁹²

For the next several years, the IMF’s response to initiatives from Zaïre continued to be driven largely by political developments. After two years of stalemate in which rival governments vied for power in Zaïre and the authorities made only token payments on their arrears, the Fund suspended the member’s voting rights. The formation of a new government in 1994, with Léon Kengo wa Dondo serving as prime minister and Mobutu remaining in power as head of state, led to a renewed effort to stabilize the economy. Zaïre stepped up its payments, roughly stabilizing total arrears for a brief period. The Fund responded by resuming technical assistance and postponing consideration of steps leading to compulsory withdrawal.

In May 1997, rebel forces led by Laurent-Désiré Kabila overthrew Mobutu, who fled to exile in Togo. Kabila revived the previous name of the country, the Democratic Republic of the Congo. Within a year, the new authorities promised to stabilize arrears again, but they failed to make good on that promise. A new civil war ensued, and the Fund continued to postpone further action until the military and political situation could stabilize. Only after the assassination of Kabila and the assumption of power by his son, Joseph Kabila, were the authorities able to make a serious effort to restart economic activity and normalize relations with external creditors. The Democratic Republic of the Congo settled its arrears in June 2002, and the Fund began lending to it through the Poverty Reduction and Growth Facility.

Iraq and Afghanistan

Similarly to Haiti, Iraq was forced into arrears as a result of sanctions imposed by the international community. The sanctions were a response to Iraq’s invasion of Kuwait in August 1990, which touched off the Gulf War of 1991. Under a UN resolution, Iraq had no access to its assets held abroad, and the authorities insisted they could not make any payments to the IMF except by using those assets. Fund officials were singularly unimpressed by this argument, especially because the outstanding balance was small. Iraq had no outstanding debts to the GRA, but for several years it had drawn its holdings of SDRs down to zero. It therefore had to use its own resources to pay the interest due on the difference between its actual holdings (zero) and its allocation (SDR 68.5 million). For 1990, that amounted to about $2.2 million, or 0.3 percent of Iraq’s quota in the Fund.⁹³ A stalemate followed, in which arrears to the SDR Department continued to accumulate while the Fund took no further action to try to collect. Eventually, following the U.S.-led military overthrow of Saddam Hussein, the new government settled Iraq’s accounts in September 2004 by paying accumulated interest of some $81 million.

Afghanistan, which also had no general obligations outstanding, ran out of SDR holdings in November 1995. For several years before then, the country had been in a state of civil war, waged in the near vacuum of governance created by the departure of Soviet troops in 1989. From 1993 on, the Fund had no reliable means of communicating with the authorities. As civil war raged, various parties tried to withdraw the $7 million (SDR 4.9 million) balance in the reserve tranche, but the Fund demurred on the grounds it could not authenticate the validity of the requests.⁹⁴

The accession to power by the Taliban further isolated Afghanistan from the world economy. The member’s SDR holdings were fully depleted (through periodic charges to cover the interest due) shortly thereafter. As with Iraq, the Managing Director issued a complaint under Rule S1, and the Fund just waited until the political situation improved. In October 2001, a U.S.-led military force attacked Afghanistan to dislodge the Taliban in retaliation for its role in enabling the terrorist attacks of September 11 that year. The success of that campaign led to a new government, which settled its arrears with the Fund soon thereafter.