IMF and international debt: some questions and answers
Washington — Matters of international finance, such as the world debt problem and the affairs of the International Monetary Fund (IMF), rank as some of the ''great mysteries of life'' for many people.
Here are answers to some possible questions:
Q The Interim Committee of the IMF met last Thursday. What's that group? What did it accomplish?
The committee is a representative body of some 23 top central bankers or finance ministers that deals with issues before the IMF. It regularly meets in the spring and just before the Fund's annual meeting, usually held in late September. Its members have enough voting power that its decisions are almost certain to be ratified by the Fund's board of governors, representing 146 nations. At last week's meeting, the committee accomplished nothing concrete. But the members held what they maintain were useful talks, discussing a possible new issue of special drawing rights (SDRs), the debt problem, and the world economic situation.
Q What are special drawing rights?
Nations like to maintain monetary reserves to cushion themselves against the possibility of a bad international payments situation. Most of these reserves are held in United States dollars. In the late 1960s, when US dollars were flooding the world, the IMF created a new form of reserve asset that would not be a liability of the US - as dollars are, but a new international form of money. These SDRs are merely entries in the books of the IMF. Nations can use them to pay off their debts to other nations (but not to businesses or individuals). Like dollars, which central banks invest, SDRs pay interest, though a comparably modest amount.
Q What was the SDR discussion about?
The developing countries would like the IMF to issue a new batch of SDRs to help rebuild their reserves. The so-called Group of 24 - representing the world's poorer nations - met April 11 and issued a communique noting that the ''acute stringency'' in their reserves meant that many countries were ''severely constrained'' in buying imports, harming their domestic investment and growth and hurting world trade. They suggested issuing 15 billion new SDRs for three years to supplement their reserves. An SDR is worth a bit more than $1.
The industrial countries were less keen on such a sizeable SDR issue, reportedly talking of 5 billion SDRs a year instead. US Deputy Treasury Secretary R.T. McNamar, for instance, suggested that a major new issue of SDRs might be inflationary. If nations have bigger reserves, they presumably will use some of that money to buy more goods and services abroad. This extra demand, the theory goes, could result in higher prices.
Moreover, Mr. McNamar argued, a new issue of SDRs might even leave debtor countries worse off.
Since SDRs are allocated to nations according to their IMF quotas (the amount each nation contributes to this international fund used to help countries with international payments problems), the big and economically powerful countries get most of any new batch of SDRs. Argentina would only get 12 million SDRs for every 1 billion SDRs issued, or something more than $180 million if 15 billion SDRs were issued. That compares with Argentina's total foreign debt of about $40 billion, needing around $5 billion in interest payments alone per year.
Mr. McNamar also suggested that if new SDRs prompt more inflation, creditors will demand higher interest rates to offset that inflation. And the higher interest rates could cost a major debtor nation more than its new allocation of SDRs.
It may be that the industrial countries and the developing nations will compromise on the size of an SDR issue by the annual IMF meeting in September. Interim Committee Chairman Wily de Clerq, Belgium's minister of finance, said that ''there is a growing feeling that the decision (on SDRs) can't be kept out of the air for a long time.''
Q Is the huge debt problem of the developing nations, discussed by the Interim Committee, solvable? Or all the reschedulings of debts merely piling new debts on old bad debts?
Jacques de Larosiere, managing director of the IMF, says the debt problem has not gone away. But it is ''absolutely manageable.''
Q Are reschedulings of debt, such as that at the end of last month for Argentina, a bailout for commercial banks?
Not really. The reschedulings usually involve the banks coming up with even more loan money for the developing nation involved. However, the Argentine arrangement at the end of March did save many American banks from declaring the loans officially in arrears and subtracting from their earnings the unpaid interest. To US officials it was perhaps more important that international money markets were not disturbed by the failure of Argentina to service its debts on time.