At the London summit in early April, the leaders of the world’s twenty richest countries decided that the International Monetary Fund (IMF) will be a major instrument to respond to the financial and economic crisis. They agreed to quadruple the Fund’s resources from $250 billion to $1 trillion. But is the IMF fit for the purpose? Have some of these leaders forgotten how the IMF imposed harmful conditions in their own countries in the wake of the 1990s crisis which contributed to sink their countries further? What will be the outcome of the G20 decision for the tens of millions of people who are already suffering from the combination of the food, financial, economic and climate crises?
Eurodad’s new research "Bail-out or blow-out? IMF policy advice and conditions for low-income countries at a time of crisis" shows that the IMF is still advising stringent fiscal and monetary policies to low income countries as well as controversial structural reforms. If the Fund is to provide funding to poor countries to meet the financial gaps created by the crisis it has to change and it has to do it soon. Reacting poorly and reacting late may mean death and starvation for millions of people in poor countries.
Recent reforms at the IMF: not so fast
The renewed importance of the IMF and recent changes it has instituted mean less for low income countries than for middle income ones. Terms of lending for poor countries may remain largely unchanged, and therefore very unattractive to indebted governments. The new Flexible Credit Line (FCL), which is to provide precautionary credit with very low conditionality, will only be available for what the IMF calls “strong performers”- that is richer middle income or high income countries with policies judged adequate by the Fund. The Fund has also recently reformed some of the features of the Exogenous Shocks Facility (ESF) to ease low income countries’ access to Fund’s resources in the event of external shocks. More recently, in March 2009, the Fund also phased out Structural Performance Criteria, one type of condition attached to their loans.
Particularly in times of crisis large amounts of finance for these countries should be channelled at highly concessional terms to avoid new rounds of debt that may strangle these countries’ fiscal space in the near future. IMF conditinality has been strongly criticised by some Southern country governments and independent researchers for obliging impoverished countries to adopt stringent fiscal and monetary policies. If this continues it will prevent increases in government expenditure to maintain economic activity at this time of crisis and safeguard pro-poor spending. As a Ministry of Education official in Sierra Leone stated, “IMF policies create and sustain poverty. IMF/World Bank policies are diametrically opposed as the former stymied the realisation of the latter”.
IMF conditions and advice at a time of crisis
Restrictive IMF conditions and policy advice, which have already been problematic in times of economic growth and increasing aid flows, would be reckless in times of crisis. Poorer countries must be given the fiscal space necessary to pursue the kinds of counter-cyclical policies currently being used by rich countries, especially as the current financial and economic crises come on top of severe poverty and food price crises. UN Secretary General Ban Ki-moon warned G20 leaders before their summit in London that “at least $1 trillion is needed to help developing countries get through the global financial crisis ... In providing this support you will bolster the global economy, help to underpin your own growth, and secure global stability.” This will obviously require that richer countries mobilise additional resources to help countries bridging the giant financing gaps they face and that these countries are allowed to implement policies which allow them to boost their economies.
The role of the IMF is paramount, not only as a lender but also as a gate-keeper for other incoming financial flows, as bond buyers and donors typically require that recipient countries are on-track with an IMF programme as a key “signal” to decide whether grants and loans continue flowing. The IMF has a strong role in determining what happens to incoming aid. In 2007 Sierra Leona’s foreign aid suddenly dried up because of a negative IMF assessment. Countries such as Ethiopia continue to raise these concerns. In January 2009 the government of Ethiopia submitted to the IMF its request to be approved for the Fund’s Exogenous Shocks Facility. It wrote that “several donors have been delaying disbursements because of concerns about Ethiopia’s macroeconomic situation. ESF access would not only close the remaining financing gap in 2009, but also strengthen the credibility of Ethiopia’s macroeconomic policy commitment”.
This briefing reviews ten IMF crisis loans for low income countries, including the four Exogenous Shock Facilities approved since the end of 2008, four Poverty Reduction and Growth Facilities (PRGF) approved in 2009, and two Stand-By Arrangements for Armenia and Mongolia. It assesses whether, in times of crisis, IMF programmes allow for greater flexibility in these countries’ fiscal and monetary policies, as well as in the structural reforms. The briefing reviews both IMF binding and non-binding conditions and programme objectives which are not subject to strict conditionality.
Eurodad findings show that IMF programmes for low income countries are granting extremely limited additional flexibility in fiscal and monetary policies. Limited flexibility is clearly granted on a very short-term and temporary basis, while emphasising the need to rapidly return to tighter fiscal and monetary objectives. Of the ten countries for which Eurodad has assessed the new IMF programme:
•five programmes push for wage bill freezes or cuts;
•five have to reduce their deficit, and
•all have to make spending cuts;
•five out of the ten programmes still prompt governments to pass on food and fuel rises to their citizens.
•None have flexibility to defer debt payments. Indeed for Senegal the Fund also requires as a binding condition that “any proceeds from asset sales be used for settlement of payment delays, and repaying nonconcessional debt”.
Slightly greater flexibility compared to previous years is shown with regards to structural reforms . Privatisation and liberalisation related reforms are less frequent in the programmes reviewed. They tend not to be imposed any longer as binding conditions, but they still appear as an integral part of some Fund programmes. In some programmes, such as the ESF for Senegal, Malawi, and the Kyrgyz Republic, structural reforms are strongly focused on public financial management, with much less - or none - structural reforms in other areas. However, all programmes without exception still foster structural reforms which may be deemed controversial, such as raising utility tariffs, tax reforms aimed at strengthening indirect taxation, financial and energy sector privatisation, or trade liberalisation.