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World Bank crisis-lending contravenes Eurodad responsible lending principles

The map identifies 38 of the 40 Heavily Indebted Poor Countries (HIPC). Black: Countries which currently qualify for full HIPC relief. Olive: Countries which currently qualify for partial HIPC relief. Beige: Countries which are eligible for HIPC relief but have not yet met the necessary conditions. Source: wikimedia. Creative Commons Attribution ShareAlike 3.0 license.Despite commitments by the World Bank to significantly reduce conditions attached to its loans, research from Eurodad reveals that a massive 57 conditions were attached to three loans given to Ghana in 2009. 12 out of the 57 conditions were stipulated in a side document, and not made explicit in loan agreements themselves, contravening responsible financing principles.

These economic policy conditions restrict the right of Ghana - a country with good democratic credentials - to decide for itself how to recover from the global crisis and boost sustainable investment. The reforms that the World Bank imposes may hinder not help Ghana's development and democratic institutions, write Nora Honkaniemi and Clare Birkett of Eurodad.

Ghana, from riches to rags

This decade it appeared Ghana could be well on the way to becoming a development success story. Praised for its functioning multiparty democracy, fast economic growth and prosperous business environment, there were high expectations by Ghanaians and donors alike, that the country would graduate from low to middle income status in the mid 2000s.

However, Ghana felt the pinch, or more like the punch, of the global financial meltdown. In 2008 it suffered a fiscal gap of almost US$ 3,500 million- roughly 20% of the country’s Gross Domestic Product (GDP),(1) as a consequence of domestic and external shocks, such as fuel, energy and food crisis, droughts and floods, and the wider effects of the crisis.

To address Ghana’s fiscal gap, the World Bank approved loans to Ghana to the tune of US$535 million in 2009 to support three credit facilities. In total, the International Development Association (IDA), the World Bank's concessional lending arm, plans to provide US$1.2 billion until 2011.

Since the review of conditionality held in 2005, (2) the World Bank states that it has dramatically decreased the number of economic policy conditions attached to its development finance. However, research from Eurodad shows that altogether, these three loans to Ghana have 57 conditions attached, including both binding conditions and benchmarks.

World Bank policies continue to influence economic policy in Ghana

12 out of 57 conditions are not made clearly explicit in loan agreements, but they refer to the Letter of Development Policy (3) (LDP) by the Government of Ghana to the World Bank, signed in June 2009. This letter allows the details of the conditions upon which the loan is agreed to be explicitly left out of the loan document. Such practice decreases transparency over the reforms required by the Ghanaian government to be able to access development finance by the World Bank. This contravenes the principles for responsible financing as detailed in the Eurodad Charter, which states that “all details in relation to the loan must be contained within one document. Side letters are not permitted.”

The impacts of conditions placed on loans in Ghana - helping or hindering poverty?

11 out of the 57 conditions apply to the energy and extractive sectors. Ten focus on fiscal policy, and nine on public sector reform.

Conditions on energy state that Ghana must approve an electricity sector financial recovery plan, which in fact includes increases in electricity tariffs. But, as Abdullah Darimani, from Third World Network Africa says: “Many analysts believe the proposed tariff increases [Volta River Authority: 155%, GRIDCO: 173%, Electricity Company of Ghana: 151.5%], are the results of a push by the World Bank.” (4) Electricity price hikes will hinder poor consumers’ and local small companies’ access to energy.

Another condition champions private investment in power generation (IPPs) and in the “Letter for Development Policy,” regarding utilities, the government commits toencourag[ing] the private sector to participate in the accelerated growth agenda through Public Private Partnerships (PPPs).”

Research by the United Nations Development Programme has shown how the push by the IFIs to privatise basic utilities in Sub-Saharan Africa increases, rather than decreases, poverty and inequality. (5) It adds, “the focus of investors on cost recovery has not promoted social objectives, such as reducing poverty and promoting equity”.

Conditions on fiscal policy, further outlined in the LDP, stipulate that deficit reduction must be achieved. Consequently, the Government of Ghana has committed to reducing the fiscal deficit from 14.5 % of GDP in 2008, to 4.5 % in 2011, with further reductions planned.

It is unlikely that such dramatic deficit cuts and stringent inflation targets can be met by only cutting non-priority spending. In order to achieve this enormous reduction, the government is, in line with commitments made in the LDP, already planning:

  • A hiring freeze in the public sector. Thismay limit the ability of the state to hire workers to provide essential services may also have a negative impact on the poor.

  • Public sector reform, including the divestiture and commercialisation of state owned enterprises. This is reminiscent of policies in the 1980s when Ghana implemented Bretton Woods-led programmes like the Economic Recovery Programme (ERP) and Structural Adjustment Programmes (SAP), which resulted in the massive retrenchment of workers.

One of the conditions requires the Government of Ghana to postpone investment projects to contain expenditure. Declining public investment can jeopardise the basis for long-term growth and development. “The assumption is that once macroeconomic stability is achieved, the private sector will undertake the necessary investments for growth. Such an assessment remains grossly inadequate for promoting development in Low-Income Countries, in which substantial public investments in basic infrastructure will be necessary to accelerate and sustain growth.” (6)

Another condition requires the Ghanaian government to tax the income and profits of oil extracting companies in the country. However, this call for an enhanced fiscal regime for the extractive industries in the oil sector is effectively undermined by another arm of the World Bank which gives loans to the private sector - the International Finance Corporation (IFC). In 2009, the IFC approved loans of US$215 million to Kosmos Energy and Tullow Oil for the exploitation of newly found oil and gas reserves in Ghana. At the time, civil society organisations raised concerns that "Kosmos Energy Ghana HC is indirectly wholly owned by Kosmos Energy Holdings, a privately-held Cayman Island company.” (the Cayman Islands is an off-shore jurisdiction which all too often is used by multinational companies to avoid or evade taxes).

Harmful conditionality must end

Eurodad’s research has shown that despite promises to allow developing countries to take ownership over their developing processes, the World Bank continues to influence developing country economic policies by imposing conditions on recipients in loan agreements. The developing country is in the driver’s seat, but the World Bank is a co-pilot who continues to read the map. Moreover, these conditions, a share of which are controversially not explicit in loan agreement documents, often have harmful impacts on a country’s economy and reduce its policy space.

If the Bank is committed to achieving sustainable development goals through its lending, its practices need to be live up to its promises to allow developing countries their legitimate right to decide on their own future.

This article was originally published in the independent online magazine www.opendemocracy.net on August 31, 2010

REFERENCES

1 Annex 2, Economic Governance and Poverty Reduction Credit, Letter of Development Policy, June 2009.

2  Review of World Bank Conditionality, Operations Policy and Country Services, World Bank, September 9, 2005

3 The Letters of Development Policy can be found in Annex 1 of the following documents The Second Natural Resources and Environmental Governance Development Policy Operation (DPO-2) and Economic Governance and Poverty Reduction Credit (EGPRC)

4 Interview with Abdullai Darimani, Environment Programme Officer, Third World Network Africa

http://www.ipc-undp.org/pub/IPCPolicyResearchBrief3.pdf

6 Standing in the way of development, A critical survey of the IMF’s crisis response in low income countries, A Eurodad & Third World Network report in cooperation with the Heinrich Böll Foundation, April 2010

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