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How ‘reformed’ is the IMF?

By Jayati Ghosh

(July 14, New Delhi, Sri Lanka Guardian) Only recently, the International Monetary Fund (IMF) was a shunned institution on life support. Its credibility was battered by its consistent inability to predict crises or deal with them effectively. Criticism of its functioning was no longer confined to dissident economists and Left-wing activists. Even the Right-wing economist Robert Barro concluded that "the typical country would be better off if it could commit itself not to be involved with IMF loan programmes", while Jeffrey Sachs called the IMF the "Typhoid Mary" of emerging markets, spreading economic recession wherever it went.

Its lending programme was in tatters, rendered irrelevant by the expansion of private finance and the developing world's increasing dislike of being subject to IMF conditionalities, and it was a net recipient of duns repaid by developing countries. To add insult to injury, its own fund management was criticised as incompetent by the IMF's external auditors. The organisation had to shed staff and office space, and was on the verge of irrelevance.

Extraordinary as it may seem, the current global financial crisis has given the IMF a new lease of life. In April, Group of Twenty (G-20) leaders agreed to triple the IMF's own capital to $750 billion, and to create an additional $250 billion by issuing Special Drawing Rights (SDRs), the institution's own reserve asset or quasi-currency that borrowing nations can draw upon if needed. So, despite all its known rigidities, incompetence and open adherence to the interests of global capital, the IMF is once again in a position to become a major (in some cases the sole) source of much-needed liquidity to developing countries in financial distress, this time caused by a global crisis that is not of their own making.

As a result, IMF lending programmes to the developing world have revived after being in the doldrums. Between 2002 and 2007, repayments from member countries exceeded fresh loans. But starting from late last year, there has been a huge rise in new lending, with new lending arrangements announced in the wake of the crisis.

More than half of the amount committed by the IMF between November 2008 and June 2009 consists of loans to transition economies in east and central Europe. These economies have large deficits and external debt positions, but more importantly they are heavily indebted to west European banks, whose portfolios would be severely affected by default. So the IMF loans to eastern Europe can amount to settling the counterparty risks of several European banks.

In seizing this opportunity to reinvent itself and become significant once again, the IMF claims that it has changed. It has suddenly become a votary of Keynesian countercyclical policies - for the developed countries! After the G-20 summit, the head of the IMF Dominique Strauss-Kahn said in a press conference, "The IMF has been outspoken during the crisis in pressing for a coordinated response to the crisis through cuts in interest rates, big increases in government spending, cleaning up the financial sector, and bolstering regulation".

This will no doubt surprise governments in developing countries who are used to the IMF demanding precisely the opposite from them when they have had to approach the institution in a crisis. And it is also likely to inspire hope that the IMF has indeed changed its attitude to what is the correct policy response in crisis.

Such a hope would be reinforced by the IMF's own claims. The organisation has announced that it is "modernising" and streamlining its loan conditionalities and will rely more on pre-set qualification criteria (ex-ante conditionality) rather than on traditional (ex-post) conditionality. It has supposedly increased access to non-conditional loans, to provide more lending without strings.

So does that mean that the bad old IMF is a thing of the past and developing countries no longer need to be concerned about the impact of dealing with the IMF? Sadly, that is not the case. All these countercyclical measures are only to be applied in developed economies. For the developing world, it turns out that, despite all protestations to the contrary, the old conditionalities are still applicable: tightening fiscal policy and cutting expenditure, raising user charges on utilities and public services, tight monetary policy and high interest rates.

Consider the following examples:

l In Latvia, the government has to cut government spending equivalent to 4.5 per cent of gross domestic product (GDP), through 15 per cent reduction in local government employees' wages, a 30 per cent cut in nominal spending on wages from 2008 to 2009, a pension freeze and a value-added tax increase.

l In Pakistan, the fiscal deficit has to be reduced from 7.4 per cent of GDP to 4.2 per cent by lowering public expenditure, eliminating energy subsidies and raising electricity tariffs.

l In Hungary, the fiscal deficit must be reduced from 3.4 per cent of GDP to 2.5 per cent by freezing public sector wages, placing a cap on pension payments and postponing social benefits.

l For Ukraine, where GDP will decline by nine per cent this year, the fiscal deficit has to be brought down to zero, by freezing public wages, pensions and other social transfers, postponing for a minimum of two years any increase in the minimum wage and cancelling promised tax cuts.

Even the much-vaunted claim that the IMF will now encourage social sector spending does not amount to much. In Pakistan social spending has been allowed to increase by 0.3 per cent of GDP. But since this is combined with the aggregate budget cuts of more than 10 times that amount, the likely positive impact will be minimal. In general, IMF tolerance of small increases in social spending is combined with other fiscal conditions that undermine public provision in the social sectors.

Similarly, the IMF continues to recommend tight money policies and interest rates designed to meet inflation targets to developing countries that have come to it for funds even after the crisis.

So developing countries faced with a global crisis that was not of their making are once again exposed to the damaging conditionalities imposed by the IMF in return for small amounts of finance, provided at market interest rates, which will add to their future debt!

This could easily have been avoided, if the proposals made at the conference on financial reform organised over June 24-26 by the UN General Assembly had been accepted. A fresh and unconditional of SDRs, with double the allocation for Least Developed Countries could have dramatically eased the current liquidity constraints of many developing countries.

This is still possible, just as alternative regional financial arrangements that reduce the power of the international financial institutions (IFI) are still possible. But for these to come about, much more pressure is required from the citizenry of developing countries, especially those in the G-20, to force their governments to push for these more progressive alternatives.
-Sri Lanka Guardian

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