TWN Info Service on Finance and Development
Summary findings of Jubilee report on IMF policies in the post-crisis era
A Jubilee USA Network report on the IMF, titled “Unmasking the IMF: The post-financial crisis imperative for reform,” provides an overview of IMF reforms in response to the financial crisis and argues that despite changes to the design and operation of lending facilities, the macroeconomic policy conditions for loan programmes pose many problems to developing country borrowers.
The report states that many Fund policies continue to constrain public spending and impede recovery from the economic recession afflicting low-income countries in particular. Pro-cyclical fiscal and monetary policies continue to appear in IMF programs for many low-income countries. In the select countries where the IMF did allow fiscal and monetary breathing space in the depth of the financial crisis in 2008-9, the Fund is now advising policy tightening in most cases, which may be premature, with adverse effects, for many low-income countries.
According to the report, increased IMF lending to low-income countries threatens to undermine those countries’ long-term debt sustainability and counter the positive effects of debt relief initiatives. Despite windfall profits far above projected levels from the sale of its gold reserves, the Fund has not committed to using that extra revenue for increased debt relief and grants for LICs.
The report concludes that without genuine reform of the IMF’s strict fiscal and austerity requirements, lending procedures, and structures of accountability, the institution’s expanded crisis role may actually keep low-income countries from recovering, push them into greater debt, and hinder long-term development.
Jubilee USA Network is an alliance of more
than 75 religious denominations and faith communities, human rights,
environmental, labor, and community groups working for the definitive
cancellation of crushing debts to fight poverty and injustice in Asia,
The full briefing is downloadable from:
Below is the summary from the briefing, and excerpts in the areas of IMF impacts on public sector wages, hiring, spending, and debt sustainability in low-income countries, as well as on ex-ante conditionality being required in the new crisis-prevention facilities being designed by the IMF.
With best wishes,
Summary of Jubilee
The global financial crisis in late 2008, on the heels of the global food and fuel crisis, had grave and far- reaching repercussions across the globe, particularly for low-income countries (LICs). In April 2009, G-20 leaders designated the International Monetary Fund (IMF) as the central vehicle for global economic recovery and tripled the Fund’s lending capacity from US$250 billion to US$750 billion. By 2014, the IMF’s concessional lending capacity to LICs will be ten times higher than it was before the crisis.2 Further, the IMF intends to seek another capital increase of $250 billion from the G20 in the coming months.
When the U.S. government allocated an additional $100 billion in IMF resources in June 2009, civil society and humanitarian organizations expressed deep concern due to the Fund’s checkered record in predicting and responding to crises (including the most recent global financial crisis), and the harsh austerity and pro-cyclical measures that accompany IMF lending. In fact, the IMF’s negative reputation had led many countries to avoid engagement with the Fund altogether.
In response, the IMF has gone to great lengths to demonstrate its commitment to change. The Fund says it learned from the mistakes it made during the East Asian crisis and has reformed its programs to provide greater flexibility for LICs to adopt counter- cyclical, expansionary policies. Likewise, the Fund has reduced its use of controversial conditionalities such as public wage freezes or privatization.
New crisis lending facilities, such as the Flexible Credit Line (for middle income countries) and the Precautionary Credit Line, ostensibly have little or no conditionality attached. Finally, the Fund is in the process of reforming its governance structure to reflect the changing global economy.
Despite the IMF’s claims, analysis of Fund policies demonstrates that much of the reform is marginal and does not represent a solid departure from past IMF orthodoxy. IMF policies continue to constrain public spending and impede recovery.
Specifically post-crisis analysis finds:
· Pro-cyclical fiscal and monetary policies continue to appear in IMF programs for many LICs. In the select countries where the IMF did allow fiscal and monetary breathing space for a time, the Fund is now advising premature tightening in most cases.
· Where explicit conditions to freeze public wages or reduce health and education spending do not appear, continued focus on tight fiscal targets and onerous reserve requirements often result in public spending reductions in these areas.
· The “rigorous qualification criteria” attached to new crisis lending facilities, such as the Flexible Credit Line and the recent Precautionary Credit Line, amount to ex-ante conditionality.
· Increased IMF lending to LICs threatens to undermine those countries’ long-term debt sustainability and counter the positive effects of debt relief initiatives. Despite windfall profits far above projected levels from the sale of its gold reserves, the Fund has not committed to using that extra revenue for increased debt relief and grants for LICs.
· The much-heralded voice and vote reform at the Fund is a small step in the right direction but will not make the institution more accountable to the low-income countries that are most affected by Fund policies.
· Without genuine reform of the IMF’s strict fiscal and austerity requirements, lending procedures, and structures of accountability, the institution’s expanded crisis role may actually keep low-income countries from recovering, push them into greater debt, and hinder long-term development.
· Allow for pro-poor macroeconomic policies and social spending during the crisis and beyond in IMF programs;
· Stop adding to the debt burdens of LICs; and,
· Restructure IMF governance and decision-making processes to make them more accountable to the countries and populations most affected by Fund policies.
Restrictions on Public Sector Wages, Hiring, and Spending
In October 2009, the
An August 2010 loan agreement requires that
In order for
IMF Lending to LICs Threatens Debt Sustainability
In the wake of the economic crisis, G20 governments proposed that the IMF substantially increase support to low-income countries (LICs). Indeed the Fund increased its lending to LICs in 2009 to $3.8 billion (compared to $1.2 billion in 2008). In September 2010, the IMF announced that it had raised $8 billion for concessional lending to LICs, keeping the institution on track to provide up to $17 billion by 2014.
While low-income countries need support, anti- poverty organizations and some governments urged the IMF to provide debt relief and grants to LICs instead of new loans. Further, they called for the institution to use internal resources, particularly proceeds from the scheduled sale of 403.3 tons of gold, to finance increased support to LICs.
Despite huge profits from the ongoing sale of IMF gold, the IMF has slated the vast majority of the proceeds for its own administrative budget. The failure to tap existing gold resources to fund its commitments forced the Fund to rely on contributions from member countries. This reliance on additional bilateral contributions raises concerns that donors will channel already scarce aid resources through the IMF to finance its modest support for LICs. Meanwhile nearly two-thirds of the IMF’s gold sales are complete – raising nearly $3 billion in windfall profits so far due to the higher-than- expected price of gold. The IMF has yet to commit any additional money to help low-income countries, and refuses to discuss the issue until all the gold is sold.
A more fundamental concern is the damaging impact of adding new debt to low-income countries in the wake of a crisis not of their making. After repeated public calls for deeper debt relief and non-debt creating assistance, the IMF announced with much fanfare in July 2009 that it would provide “interest relief” for two years to LICs. This was a welcome step, but does not come close to meeting the need for non-debt creating assistance for LICs. In the end, this initiative is worth only $55 – 70 million for LICs over 2 years – just $500,000 annually per country that qualifies.34 Interest rates will rise on zero-interest loans in 2011 and the rest of IMF support for LICs adds to their debt.35
New Crisis “Insurance” Facilities Require Ex-Ante Conditionality
In January 2009, the IMF announced a new Flexible Credit Line, to ensure that finance would be quickly available for countries facing liquidity crises. The ostensible goal of this new instrument was to create a “safety net” so that countries facing balance of payments shortfalls could institute counter-cyclical policies without having to implement typical IMF conditionalities.
In reality, however, countries only qualify for the new FCL if they have already implemented macroeconomic reforms to the satisfaction of the IMF. The FCL’s “rigorous qualification criteria” closely follow the Fund’s typically tight fiscal and monetary policy requirements. These criteria include low inflation rates, a “comfortable reserve position,” and a “track record of access to international capital markets at favorable terms.”30
So far, only three countries – Colombia, Mexico, and Poland – have qualified for and accessed the FCL, though none of them have drawn down the credit line.31 The strict qualification criteria mean that the FCL will very likely not be available to any low- income countries in crisis.
G20 2010 co-chair
In addition to the ex-ante conditionality reflected in the qualification criteria, the PCLs include ex-post conditions to bring those countries into line with the Fund’s macroeconomic vision. So far, the PCL is purely theoretical, since the IMF has not identified any countries that qualify. Thus, while the FCL and PCL were created to make the Fund more relevant in a post-crisis world, the ex-ante conditionalities required by these lending facilities do not represent a departure from past IMF policy imposition.