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Soren Ambrose

PSI Looks Set to Extend IMF Domination

IMF Adds a New Tool to its Bag of Tricks

An announcement by International Monetary Fund (IMF) Managing Director Rodrigo Rato at the annual meeting of the African Development Bank in Abuja, Nigeria in May signaled the inauguration of a new tool for ensuring IMF - and by extension, U.S. and G8 - control of national economic policies in Global South countries. After going through several low-key proposals and different names, a paper defining the Policy Support Instrument (PSI) has been completed - and leaked to civil society (“Policy Support & Signaling in Low-Income Countries,” IMF Policy Development and Review Department, June 10, 2005).


by Soren Ambrose

September 2005

The New Facility and G8 Debt Cancellation

The idea of this new IMF device arose in the context of G8 negotiations on multilateral debt cancellation, which culminated in the June 11th announcement by G8 Finance Ministers and confirmed at the July G8 Summit. If the G8’s debt plan is implemented as currently written - something that powerful forces in the IMF are trying to prevent - the debt claimed by the IMF in 18 countries would be eliminated, with no new conditions required.

That would mean that countries could move to free themselves from the grasp of the IMF, and the treadmill of conditions and debt it has overseen. If they chose to take no further loans from the IMF, countries would, presumably, no longer have to accept its conditions. But if the PSI’s potential is realized, those countries could be required to enter that program in order to qualify for new assistance, credit, or trade deals. The PSI, in other words, could significantly limit the positive impact of any G8 debt cancellation.

The PSI was first hinted at during the IMF/World Bank meetings in October 2004. After the G8 failed to reach an agreement on debt at its June 2004 summit, public statements from Canadian Finance Minister Ralph Goodale and U.S. Treasury Secretary John Snow in September alluded to the possible creation of a new IMF “facility” that would serve the ostensible “ needs” of countries that neither want nor need a full-blown IMF program.

The communiqué of the IMF’s oversight body at the April 2005 meetings put the institution and its most powerful members on record for the first time as supporting such a facility, though its definition was left vague. Goodale and Snow - and Rato in Nigeria - made it sound like a staff monitoring program (SMP), in which a country submits to IMF supervision without getting any new loans; in April it was described more as a new program to “pre-qualify” countries for IMF loans if they were hit by a currency crisis. This sort of “pre-qualification” failed to attract even one country to the IMF’s Contingent Credit Line, which was recently terminated for lack of interest, so it is unlikely that this will be viewed as the PSI’s primary function, though it is a major concern of the IMF’s paper.

Whichever way it is framed, it is likely to serve the same purpose: a formal method for continuing to impose IMF conditions on countries even if they are no longer officially indebted to the IMF or taking loans from it.

IMF: Still in the Driver’s Seat

Until now the IMF has relied on a very effective “unwritten agreement” whereby donors and creditors - including the World Bank - all defer to the IMF in determining which countries are creditworthy. When the IMF cuts off its loan program to a country for non-compliance with its policies, the World Bank, regional development banks, and bilateral agencies generally follow suit. With the prospect of 100% cancellation with no additional conditions, the IMF’s relationship with low-income countries, under current practices, is threatened. It seems no coincidence that the PSI has now been invented. Just when liberation seems possible, the IMF will find a new way to control and determine countries’ economic policy choices.

This may answer some of the suspicions that arose when the Bush Administration, somewhat out of character, declared its support for 100% debt cancellation with no new conditions. After all, if one accepts the premise that the primary function of debt in the global economy is to allow powerful countries to maintain control of weaker countries’ economies - with the IMF and World Bank serving as the tools for doing that - an obvious question when a 100% debt cancellation program is proposed would be “how will they continue to maintain that control?

Nigeria: Testing Ground for the PSI

It is fitting that Rato made his announcement in Abuja because Nigeria is to be the “pilot” for the PSI, as part of its agreement with the Paris Club (bilateral creditors) for an unprecedented debt deal. The Paris Club requires that countries applying for relief be under an IMF program, but the prospect of agreeing to one is political dynamite in Nigeria. The Paris Club was however under great pressure to complete a landmark deal with Nigeria, where the legislature had threatened to simply repudiate the debts, so the PSI was deemed an acceptable alternative. Nigerian Finance Minister Ngozi Okonjo-Iweala told Reuters on May 18 that “the IMF makes sure it is as stringent as an upper credit tranche program and then monitors it like a regular program, but the difference is that you develop it and you own it." This sort of “ownership” does not sound very promising to observers familiar with the IMF’s and World Bank’s manipulations of that term, but apparently it was considered sufficient to sell the deal to the Nigerian public.

A deal with the Paris Club was announced in early June, writing off 67% of Nigeria’s bilateral debt. Nigeria will then “buy back” the remainder over the next two years with about $12 billion in windfall profits from its recent oil sales. Commentators are now asking whether the multi- billion dollar outlay required for the buy-back won’t negate many of the potential benefits, especially since the country will also have to stay in good standing with the IMF - i.e. continue taking economic policy orders from the institution.

IMF Goes High-Profile with the PSI

In Abuja, Rato indicated that while the PSI has not yet been formally created, “it would be formally defined, but it will not require any changes in our relationship with Nigeria.” (“Nigeria Set to Christen New IMF Agreement - Finance Minister”, Reuters, May 18, 2005) In fact, the IMF has monitoring programs with a number of countries that are not borrowing money. So why create a new name and make new announcements as if something new were happening?

The IMF paper is silent on this matter - it never even mentions the existence of staff-monitoring programs. It does compare the PSI to the standard “Article IV” surveillance the IMF regularly carries out on every member country, acknowledging that “while Article IV consultations provide policy advice, support, and an assessment, these may not be frequent or specific enough.” What is needed, argues the paper, is “a new instrument allowing closer engagement than under Article IV consultations while sending clear signals on the strength of a member’s policies.” Unpacked, this means that although the scope of the PSI will not differ much from standard IMF surveillance, Article IV is not enough because the IMF does not customarily use those reports as its instruments of coercion, and they are not looked to by other donors and creditors as “signals” on whether a country should be considered creditworthy.

For countries like Nigeria that already had staff-monitored programs, the PSI is a change of form more than substance; the difference lies precisely in the arrangement being “formally defined.” It is the spotlight thrown on the process that makes it news. By giving these programs a formal name and definition, and by publicizing them with press conferences and a new study (drafts of which are now being leaked), the IMF is assigning this function a new status, a new political profile. It is saying more straightforwardly than before that it will be "available" to impose its views on Southern countries even if they manage to extricate themselves from both multilateral debt and IMF programs. The staff monitoring programs have often grown out of a series of interactions between the IMF and the client-country, and are grudgingly accepted in order to demonstrate that the country does not need a formal program, or to reassure other creditors. As a consequence of the formalization of this process, a wider range of countries can presumably more easily be pressured into accepting a PSI.

The PSI in Detail

The official description in the IMF paper frames the PSI as the answer to “how the Fund’s instruments and practices might be adapted to support sound policies in low-income members, in particular those that do not have a need or want to use Fund resources.” Its outline of the main elements of the PSI includes:

- The PSI would be based on the country’s PRSP, thus “ensuring ownership.

- It would “consist of a policy framework normally focused on consolidating macroeconomic stability and debt sustainability, while deepening structural reform in key areas that constrain growth.” This is the standard code for the standard set of IMF conditions.

- It would “provide the basis for rapid access to concessional Fund resources in the event of shocks.” Again, this is unlikely to be the main function of the PSI.

- Each PSI would be approved by the IMF Board, thus delivering “clear signals to donors, creditors, and the general public on the strength of these policies.” This will enable the IMF to maintain its signaling role even if the debt it claims is cancelled.

- It would run for between one and three years, though the paper adds that “The duration of a PSI could be extended up to a maximum of 4 years. Members could request a successor PSI.” Although the pretense is that this should appeal to the client governments, it is probably more comforting to the IMF itself and the G8 countries that control it. Ironically the paper discusses whether the PSI threatens to become a “longer-term program engagement” - something the IMF, buffeted by charges that repeated structural adjustment programs are a sign of the failure of the policies, has been forced to identify as a problem (so much so that it’s referred to by acronym - LTPE). “On balance,” says the paper, “staff does not recommend that PSIs be included in the LTPE policy, but the Board may wish to consider whether such inclusion is warranted.

Who Will Be PSI’d?

The IMF and G8 have been sending mixed signals about which countries are targeted for the PSI. Over the last year, however, what has become the PSI was usually discussed in conjunction with the plans for extensive debt cancellation by the G8. Though the two were never explicitly linked, it did not require a great deal of ingenuity to see how the PSI would become useful to the G8 and IMF in the wake of a sweeping cancellation of IMF debt.

But with the unofficial roll-out of the program in Nigeria, it appeared that it was designed for countries that had to display the IMF seal of approval but needed or wanted to keep some distance, however illusory, from the institution. If so, the PSI can be seen as a high-octane version of staff-monitoring programs.

The staff-monitoring programs have been more commonly associated with middle-income countries, such as the large economies of East Asia or South America, than with the African and Central American beneficiaries of the G8 debt cancellation plan. This brings up the possibility that middle- income countries could be an intended target of the PSI. Indeed, the same logic that makes the PSI a seemingly innocuous way of keeping Nigeria and the beneficiaries of the G8 plan in the clutches of the IMF could very easily apply to countries like the Philippines or Brazil. These are countries that have mostly left the IMF behind and do not want to be seen as submitting to it again, but because of debt or the need to attract other creditors remain vulnerable to its coercion. The IMF’s paper repeatedly emphasizes that the PSI is designed for low-income countries, but in a footnote adds, “Should middle- income (emerging market) members express interest in this type of instrument, the PSI’s eligibility criteria could be revisited or a different instrument developed tailored to their needs.

Disingenuously enough, the IMF paper describes the first group of countries expected to make use of the PSI as “ mature stabilizers that currently have low-access PRGF [Poverty Reduction Growth Facility, the IMF low-income loan] arrangements” and would like to “graduate” from the PRGF - which is to say the better-off low-income countries. This is a category that describes neither countries like the Philippines (middle-income), nor countries like Nigeria (no IMF loans), nor many of the projected beneficiaries of the G8 debt cancellation plan (which are often only recently “stabilized,” if at all, and usually quite aid-dependent). The category described by the IMF in the PSI paper would include countries like Armenia, Vietnam, and Kenya.

If the IMF paper is sincere, the PSI will probably not be very controversial in practice. But this has the look of a program that will not serve the stated function, but entirely different purposes. As the IMF presents the PSI, it is unclear what great need it would be filling for its ostensible target countries. The origins of the PSI, the timing of its launch, and its debut client, Nigeria, all suggest that the IMF’s rhetoric is calculated to conceal the true intent of the program. If so, the PSI should itself become a target - for those who want to limit, or eliminate, the continuing imposition of neo-liberal economic programs.

Soren Ambrose
Solidarity Africa Network in Action & 50 Years Is Enough Network (www.50years.org)


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