The IMF’s role and financial health have been brought into further question as a result of the early repayment of two of its largest debtors. Argentine president Néstor Kirchner announced 15 December that Argentina would repay the entire $9.8 billion debt owed to the IMF through 2008. Two days earlier, Brazil had declared an early repayment of its outstanding obligations to the IMF amounting to $15.5 billion.
Fifty representatives of religious, trade union and human rights organisations in Argentina wrote a letter to Kirchner demanding a suspension in debt repayments pending the outcome of a supreme court investigation into allegations of illegitimacy. One of the signatories of the letter, Argentine MP Mario Cafiero, said the measure had converted the IMF into a privileged creditor, and “legitimised one of the greatest frauds in recent memory”. Elisa Carrió, leader of the opposition party (Alternative for a Republic of Equals), also opposed the repayment: “This implies that Argentina waives the possibility of making the IMF share the costs of the crisis, in spite of having openly said that it was jointly responsible.”
Debt campaigning network Jubilee South pointed out that the constitutional duty of the Brazilian parliament to carry out a debt audit had been violated. In contrast to observers who believe that the IMF had not sought early repayment, Jubilee South believes that “the IMF has attributed ever greater priority to recovering its solvency – and therefore its power to act – by rigorously collecting, if possible in advance, all its large outstanding debts.” The group also pointed out that repaying IMF loans before other private financial creditors which charge higher interest rates made little economic sense.
The repayments come on the heels of a number of events which portend further moves away from the Fund in Latin America. In November, Kirchner asked finance minister Roberto Lavagna to resign, replacing him with economist Felisa Miceli, president of the state-owned Banco de la Nación. Unlike Lavagna, Miceli agrees with Kirchner’s strategy for lightening the country’s foreign debt load, and as president since 2003 of the state-owned bank, backs a pivotal role for the state in directing economic development. The IMF had targeted the bank for privatisation.
In Bolivia, president Evo Morales was brought to power in December. The former leader of the coca growers is widely anticipated to take a hard line with foreign creditors about control over resource revenues. While in Ecuador, since taking over as interim president in April, Alfredo Palacio has committed to spend $650 million to appease public protests. An IMF team was in Ecuador in November for the annual Article IV consultations and chastised the government for increased public spending which the Fund believes will lead to increased inflation, which currently sits at around four per cent.
IMF financial dilemma
According to Jubilee Research, together with Turkey and Indonesia, Argentina and Brazil are the four largest borrowers from the Fund, accounting for 70 per cent of its outstanding loans. Indonesia declared in 2003 that it would repay its debt according to the original schedule. In fact, almost every borrowing country has reduced its debt to the Fund, cutting the total debt outstanding from $90 billion to $66 billion. Together with the decision to cancel some $3.3 billion of debts owed by the poorest countries, this means total funds owed to the IMF could fall to $40 billion by the end of the year.
This raises the question of how the IMF, which uses the proceeds from its lending to cover its operating expenses, will pay its $1 billion annual bill. A 30 December article in the Financial Times suggests some quick fixes: The board could cut the target for reserve accumulation, or cut the interest rate it pays to member nations on their contributions to the Fund.
In the longer term, the IMF’s accountants have been working on a plan to cope by boosting its income from other sources. One possibility is investing a portion of reserves in higher-earning assets, such as longer-term securities. This raises the possibility of creating perverse incentives for the Fund to save its money rather than making it available to its members. Another option would be to levy charges for some of the other services the Fund provides such as technical assistance. Jubilee Research asks whether the Fund will be able “to undertake its own structural adjustment programme – to cut its own spending in line with its declining income”.