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On April 29, U.S. House of Representatives Democrat, Rep. Barney Frank, said that he supports authorization by the U.S. Congress of gold sales by the International Monetary Fund, on the condition that $4 billion of the proceeds go to poor countries. He also said that the U.S. Treasury backs his position. This is all good news regarding the IMF’s sale of 1/8th of its gold reserves, approximately 403 tons. But the terms of the transfer to poor countries via the IMF’s Poverty Reduction and Growth Facility (PRGF) are critical and remain as yet undetermined. If the money is offered as loans at market-adjusted interest rates, it could result in a significant future debt burden for poor countries, especially if these rates rise sharply over time—as they well might.
For this reason, the creation of new debt to poor countries raises real concerns about debt sustainability in the longer term. In the worst case scenario, this new debt could erase some of the gains made by the Heavily Indebted Poor Countries initiative (HIPC). The IMF is inclined to lend rather than offer grants, in keeping with its business model. Loans are fine, provided that the rates are low and fixed. The ONE Campaign has called for the proceeds of the IMF gold sale to offered as concessional funding for poor countries (a bit like the World Bank’s IDA), with as little conditionality as possible. This is a sensible option if we are to avoid major problems of debt sustainability down the road.
When the world’s finance ministers and central bank governors assemble in Washington later this month. they would do well to focus on another looming debt crisis that could hit some of the poorest countries in the world, many of whom are also struggling with problems of conflict and fragility and none of which has the institutional capacity to cope with a major debt crisis without lasting damage to their already-challenged development prospects.