The IMF: Resurgent but unchanged

At a time when a devastating financial and economic crisis is calling into question the governance and policies of all the major institutions that constitute the existing international financial order, the International Monetary Fund (IMF) appears to have escaped any such major reevaluation. While a meeting of developing countries held on the eve of the April spring meeting of the Fund has highlighted the need for reforms, the IMF, now financially reinvigorated with a fresh infusion of funds, is still pursuing some of its discredited policies. None more so, as Bhumika Muchhala shows in the analysis below, than the policy conditions it imposes on countries seeking its loans.

THE spring meetings of the International Monetary Fund (IMF) and World Bank were held in Washington, DC on 25-26 April. For the most part, the communiques resulting from the meetings addressed and reaffirmed the same issues and statements as in the communique adopted by the Group of 20 (G20) summit in London earlier that month.

It may be recalled that the IMF was the main beneficiary of that summit of developed and leading emerging economies, which agreed to boost the Fund's lending resources by $500 billion to $750 billion.

On the eve of the IMF-World Bank meetings, ministers of the Intergovernmental Group of Twenty-Four (G24) also met in Washington. The G24 was established in 1971 by developing and emerging market countries to articulate developing-country positions on financial and monetary issues.

While the G24 ministers supported the G20's proposal to treble IMF funds, they also highlighted the need for further reforms in lending instruments, conditionality and policies, toward more even-handed and broad-based implementation which better meets the needs of its developing-country members. 

On IMF conditionality, the G24 ministers called for additional reforms to 'focus and streamline conditionality, including the greater recourse to ex ante and review-based conditionality'.  However, the pro-cyclical fiscal and monetary conditionalities in the IMF's crisis response loans, characterised by reductions in public spending and increases in interest rates (see below), were not addressed by the ministers in their communique. 

The G24 ministers also called for an 'urgent and comprehensive reform of the IMF's financing framework for low-income countries so as to be able to respond more flexibly to their diverse needs'.

The IMF's surveillance function has long been highlighted as a critical area of Fund activity that needs to be approached with greater even-handedness, in that developed countries' economies should be assessed as rigorously and objectively as developing countries are. 

The G24 communique said that 'systemically important advanced countries, international capital flows, and financial markets' all require more effective surveillance by the IMF.  The G24 ministers also supported 'an early review of the role of the IMF in the international monetary system in light of the lessons of the crisis, including with respect to the major reserve currencies'.

The democratic deficits in both the IMF and the World Bank, as well as the selection of institutional chiefs, were emphasised by the G24 ministers as priority areas that require change. 

The G24 called for enacting the April 2008 agreements on quota and voice reform in the IMF. The G24 communique stated that a substantial increase and realignment of quotas in the IMF need to be completed no later than January 2011, following a comprehensive reform of the quota formula to address existing bias against developing countries.

Further balance in the representational structure of the Executive Boards and Ministerial Committees of the IMF and World Bank was called for while an additional chair for sub-Saharan Africa in the IMF was supported. 

The merit-based and competitive selection process for the heads of the IMF and World Bank was agreed to, while greater staff diversity from underrepresented regions, including at the managerial level, was emphasised.

No change in IMF loan conditions

The injection of funds agreed by the G20 represented a change of fortune for the IMF, which had suffered a sharp decline in its lending business in recent years (because developing countries had lost confidence in the quality of its policy advice and conditionality, which they deemed harmful) until the present global financial crisis led to a resurgence in lending.

Although the IMF leadership tries to project that the organisation has changed in its lending policy conditionality, an analysis carried out by the Third World Network (TWN) on the Fund's recent loans shows that the fiscal and monetary policy conditions are, as previously, contractionary and pro-cyclical.

Starting in September 2008, the IMF has negotiated Stand-by Arrangement (SBA) loans with at least nine countries: Georgia, Ukraine, Hungary, Iceland, Latvia, Pakistan, Serbia, Belarus and El Salvador. Other countries that may be negotiating loans in the near future are Turkey and Romania, while Sri Lanka has requested a loan amount of $1.9 billion.

An analysis of the IMF's policy advice and conditionalities in the areas of fiscal policy, monetary and exchange rate policies and financial sector policies directly from the official IMF loan documents with these nine countries was done by TWN.

It reveals that the Fund's fiscal and monetary policies remain as tight and restrictive now as they have been in previous years. The IMF continues to design its loan programmes on a framework of tightening fiscal and monetary policies, and establishing rigorous inflation targeting, in all nine countries.

The IMF's fiscal policy aims to reduce fiscal deficits by restraining public expenditure, in which the burden falls on public sector employees, the poor and the unemployed. Country examples of fiscal tightening are as follows:

* In Pakistan, the Fund advises a reduction in the fiscal deficit from 7.4% of gross domestic product (GDP) to 4.2% through lowering public expenditure, gradually eliminating energy subsidies, raising electricity tariffs by 18% and eliminating tax exemptions.

* In Hungary, the IMF has targeted fiscal deficit reductions from 3.4% of GDP to 2.5% through a fiscal consolidation plan which involves freezing public sector wages, placing a cap on pension payments and postponing social benefits.

* Ukraine's fiscal deficit is targeted at a zero overall balance as a binding conditionality in its loan agreement. Public savings are to be generated through freezing public wages, pensions and other social transfers, postponing for a minimum of two years any increase in the minimum wage and cancelling tax cuts that were previously scheduled for the 2009 fiscal year.

While IMF Managing Director Dominique Strauss-Kahn and other senior IMF officials have been urging countries that have fiscal and monetary space to implement fiscal stimulus programmes in order to bolster aggregate demand and boost consumption, the advice stated in the IMF's loan conditions is a sharp contrast to their statements.

For example, the IMF's SBA loan of $532 million to Serbia states that '...there is no scope now for counter-cyclical fiscal loosening. Anything less than a tight fiscal stance could also jeopardise the credibility of the programme in the eyes of foreign investors and the Serbian public. Fiscal policy will in addition need to put a tight constraint on nominal wage growth in government sectors and public enterprises.'

IMF chief economist Olivier Blanchard said in a December 2008 interview: 'What is needed is not only a fiscal stimulus now but a commitment by governments that they will follow whatever policies it takes to avoid a repeat of a Great Depression scenario.'

Furthermore, in February, Strauss-Kahn made a statement at the 44th South-East Asian Central Banks Conference in Malaysia that there is now 'a broad consensus on fiscal stimulus to restore growth'.

However, all nine country recipients of loans are being directed to implement the exact opposite policies of public expenditure reductions, fiscal consolidation plans, public sector wage cuts, and the phased elimination of subsidies.

While the objectives of these IMF-supported loan policies are to boost foreign exchange reserves and address public debt burdens, there is no clear mention or analysis of the economic and social impacts that these contractionary policies will have in economies that are already contracting in recession.

While spending on social safety nets and social assistance schemes is being supported by the IMF in several loan recipient countries, it is important to note that in countries such as Pakistan, the cumulative increase in social spending is 0.3% of GDP, whereas the reduction in public spending amounts to 3.2% of GDP.

So, while the IMF can accurately say that social safety spending is being doubled in Pakistan, from 0.3% to 0.6% of GDP, it is overshadowed by the fiscal deficit reduction required by the IMF, from 7.4% to 4.2% of GDP.

This fiscal deficit reduction is to be achieved by a 'fiscal consolidation plan', as termed by the IMF, which involves reducing public spending through: (a) an 18% rise in electricity tariffs; (b) the phasing out of subsidies; (c) spending cuts in the government budget; (d) the elimination of tax exemptions in the General Sales Tax and the introduction of a new Value Added Tax law in the parliament, among other aspects.

While positive impacts from social spending increases may benefit the national economy, these may well be undermined by the negative impacts from contractionary fiscal policy in a time of economic recession.

The IMF's monetary policy is focused on reducing inflation through inflation targeting and monetary tightening. According to the IMF, lower inflation levels are to be achieved primarily through increasing the official interest rate.

Country examples of monetary tightening are as follows:

* In Latvia, the IMF has advised raising the official interest rate by 600 basis points in 2008. According to the IMF, a reduction in domestic demand is the mechanism through which wage and price inflation are to be lowered.

* In Iceland, the interest rate was increased by 600 basis points to 18% in October 2008. The IMF stated that a tightened monetary policy in Iceland would help stabilise the domestic currency, the krona.

* The IMF called for an increase in Pakistan's interest rate by 200 basis points, to 15%, with the provision that any additional increases that may be necessary will also be implemented. The IMF also advised Pakistan to establish an 'interest rate corridor' which could protect international reserves and enable domestic financing of the government to be achieved through market placements of government securities.

In recent months, pressures and exhortations have come from many developed countries, as well as from the IMF's Managing Director, to increase the IMF's lending to crisis-affected countries and boost its resources. This would be the major mistake of the current crisis.

The documentation of the IMF's current loan conditionalities and policy advice demonstrates that the traditionally contractionary nature of the IMF's fiscal and monetary policy framework has not changed. Additional resources to the IMF would give it the means by which to discipline crisis-hit countries the wrong way, worsening the crisis for them.

In the current context of global recession and credit market turmoil, where the developed countries are implementing counter-cyclical macroeconomic policies, the IMF should not be advising developing and emerging market country borrowers to tighten their fiscal and monetary policies in a pro-cyclical manner.

In particular, given that the financial crisis today was in part caused directly by pro-cyclical macroeconomic policies, the Fund should not be prescribing them as a solution now, just as it should not have prescribed contractionary policies during the Asian financial crisis of 1997-98.

The IMF should also not be the primary and dominant vehicle to disburse financial assistance for crisis-affected countries, especially since the required reforms to the Fund have not yet been carried out.               

Bhumika Muchhala is a researcher with the Third World Network. The TWN study referred to above can be found at http://www.twnside.org.sg/title2/par/IMF.Crisis.Loans-Overview. TWN.March.2009.doc and http://www.twnside.org.sg/title2/par/IMF.Crisis.Loans Chart. TWN.March.2009.doc.

*Third World Resurgence No. 225, May 2009, pp 8-10