African Debt Relief - If It Sounds Too Good To Be True It Probably Is

We have all heard the old saw: "If a deal sounds too good to be true, it probably is." Meaning? There's usually a bear trap in the deal somewhere. This seems to be the case with the G8 approval of debt relief for Africa. This deal appears to be more investment for the rich than aid for the poor. It looks like a way to increase the hold on Africa, rather than to allow it to move forward on its own.

Naomi Klein discusses some of the dynamics of this restructuring in her article A Noose, Not a Bracelet. She notes, correctly, the suggestion by the G8 that "oil rich nations" (OPEC) pitch in and help out Africa, but hides the fact that Africa also has oil which is being very profitably exploited and not benefiting the African nations.

The realities of the African debt relief deal are starting to surface and it is a convoluted picture at best. Not surprisingly, at the top of the list is a requirement for African nations to allow more "development" and "investment" opportunities. This is typical of both IMF and World Bank "Structural Adjustment Programs." Effectively what it means is even more economic control passing into the hands of transnational corporations. As noted in an Inter Press Services article: "Campaigners focusing on debt relief welcomed the move. But the finance ministers' agreement contains a provision on privatization that has the potential to deliver to them more money than they wrote off."

Torcuil Crichton's article When It Comes to Africa, Bush has More on His Mind Than Aid, goes into even more detail of how "aid" works:

Dictators have received billions of dollars of military aid and there are enough small arms in the continent for one in 20 people to have their own personal weapon. In the two years following September 2001, the amount spent on military training for African officers has increased by over $2 million to $11.1m.

Manganese for steel, cobalt for chrome and alloys, gold, fluorspar and germanium for industrial diamonds - Africa remains a treasure trove for the world's sophisticated economies. The US continues to rely on Africa for raw materials, and for American companies there are tremendous profits in the current trade agreements that continue the age-old exploitation of the continent by the rich world.

Sub-Saharan Africa, the world's poorest place, is also its most profitable investment destination. According to the World Bank's 2003 global development finance report, the huge continent offers "the highest returns on foreign direct investment of any region in the world".

It also seems likely that at least some of the debt relief will come at the expense of future emergency aid. In other words, part of the debt written off will be subtracted from future emergency aid. While not quite the same, it is like a lender saying they are writing off your debt, and then garnishing your wages until the canceled debt is paid off. That may be debt restructuring, but it is not debt elimination.

So in exchange for revoking the debt, 18 African nations get to open their resources and economies even more to transnational corporations, and engage in more "restructuring" which has already made sub-Saharan Africa the poorest region on the planet.

There is another aspect to this "new deal" that has me confused. That involves the IMF selling off part of its gold reserve to finance the debt relief. My vague understanding of gold reserves are that they are a "hard" asset. For nations, organizations, and individuals, gold provides a firm backing in case currency values decline or fail. While the US no longer uses a gold (or platinum) standard for the dollar, the US gold reserve provides a hard tradeable "currency" in case of crisis. The IMF also has a gold reserve.

According to Forbes (3/09/05) IMF To The Rescue, the IMF holds 103.4 million ounces of gold which was locked at in 1971 at $40 an ounce. Today's US dollar gold value is $428.40 an ounce. That is a heck of an increase. The actual value of the IMF reserve is ten times what it was when its value was locked. When a similar plan to sell some of the IMF gold reserve for debt relief was suggested by the Clinton administration, there was an uproar.

An editorial at Gold-Eagle.com Proposed Sale of IMF Gold stated:

"President Clinton and Treasury Secretary Robert Rubin are currently proposing the sale of $1.5 to $3.0 billion worth of IMF gold reserves for the purpose of debt forgiveness to benefit the world's poor. I believe that the stated purpose of this proposed sale is in fact a cynical fraud; rather its real purpose is to depress and control the price of gold for the benefit of their friends.

The IMF has no gold reserves. All IMF gold is owned by and pledged by member countries in a double accounting scheme for reserve purposes. This is why congress must approve the sale of any IMF gold – it's really U.S. gold owned by the citizens of the United States. The real purpose of the sale of U.S. gold reserves through the IMF is to set a precedent for raids on U.S. reserves in the future; in other words another piggy bank to be raided any time someone dreams up a politically high-minded scheme."

Certainly the same could be argued today. Any significant release of a gold reserve onto the market would likely result in a decrease in the value of gold. Indeed, even the suggestion of the sale resulted in a drop in the value of gold (Forbes).

Another article, published in 1999 - Opposition to IMF gold selloff mounts - said that public opinion surveys in Britain and the US did not support selling of gold reserves.

In trying to figure out the "gold link," I stumbled on an interesting article from the "Free Market Gold & Money Report" title What Is Happening to America's Gold? (7/23/01). The author points to some suspicious accounting going on at the US Treasury in relation to the gold reserves. The author argues that the balance sheets don't match and that somewhere around 40 tons of the reserve are going missing somewhere. This reserve is held in the New York Federal Reserve. The author speculates:

"If we assume that the signatories of the Washington Agreement are indeed honoring their commitment, and given the size of the weight of this gold being shipped monthly out of the NY Fed, there are only two possible parties that have this much gold - the IMF and the US Treasury.

So could the Treasury somehow be swapping more gold with the Bundesbank? Or is the IMF involved? I think it is the latter.

Note all of the talk in this past weekend's G8 meeting about debt relief for poor countries, but in contrast to years past, there's been no mention of selling the IMF's gold to raise the money to provide this relief. Maybe they are purposefully not mentioning the IMF's gold because they are already tapping into it."

So if in 1998-2001 the idea of selling part of the IMF gold reserve was being argued against as a ploy for manipulating markets and enriching "friends," and if gold reserve figures and sales don't balance out and have somehow been transferred into the IMF reserve, and there are concerns about a global economic recession because of the increasing costs of oil, then one way to get that money back out might be to allow sale of IMF (and who else's) reserve at current market prices.

In relationship to African debt relief, the sale of part of the IMF reserve seems a painless (and free) answer. After all, since the value of the reserve has been held artificially low ($40 an ounce valuation) then sale at today's rates (even if it lowers gold prices slightly) is all "gravy" on the IMF's side. The fact that a stink is not being raised to this plan lends credibility to the speculations in the Gold & Money Report. Interestingly, the Forbes article claims that "Due to the economic and political complexities of selling IMF gold, the proposal to revalue IMF gold stocks--to reduce the value of IMF debt--is receiving considerable attention." The article goes on to state:

"Mobilizing IMF gold in the service of debt relief reduces the pressure on donor countries to provide more resources for debt reduction in low-income countries. While selling or revaluing IMF gold ultimately reduces the IMF's reserves, it is virtually cost-free to donor governments.

The sale or revaluation of IMF gold could become a substitute for new donor commitments. One option to overcome this challenge would be to link the use of gold to new financial resources for debt relief and/or rising aid disbursements."

SO Forbes is arguing, essentially, that sale of part of the IMF reserve, makes debt relief virtually cost free to the G8. Further, that this "relief" could be further deducted from future IMF loans to those nations.

The whole scenario to me looks like a win-win-win for the G8 (and transnational corporations) and a lose-lose for African nations whose debt is "canceled." There is also the specter of what else might be going on with the sale of part of the IMF reserve. If it is true that the IMF gold reserve is not the IMF's, but the "donor" countries (Gold-Eagle,com), then what might actually be released onto the market would be national gold reserves. Wouldn't there be some arrangement for the "donor nations" to get something back from the sale of their reserves?

"You get what you pay for" only seems to apply to the nations strangled by debt. For those with the resources, a relatively small investment can turn literally into "a pot of gold."