By Peter Chowla, Bretton Woods Project
World leaders agreed at the G20 to treble the size of the IMF’s resources, but critics worry about strengthening the Fund without fundamental reform of its governance and conditionality.
In April the G20 agreed to treble the size of available resources at the IMF, from $250 billion to potentially $750 billion (see Update 65). This was done in a way that pleased the Europeans and the US: through temporary agreements from G20 countries to extend loans to the IMF under what is called the New Arrangements to Borrow (NAB). Altering the NABs would both be temporary in nature and not alter quotas, leaving rich country voting dominance unchanged. It also demonstrates that the US administration still gets what it wants. IMF management and UK prime minister Gordon Brown, host of the G20 summit, had both called for merely doubling the size of the IMF earlier in the year (see Update 64).
Developing countries and the UN commission on financial reform had instead called for the IMF to increase its resources through either a general quota increase or selective quota increase. These methods would have permanently increased the size of the IMF, potentially diluting the dominant voting share of rich countries. The statement issued jointly by Brazil, Russia, India and China at the time of the G20 finance ministers meeting mid-March called for borrowing to “be a temporary bridge to a permanent quota increase as the Fund is a quota-based institution.” While the UN commission (see Update 65) had called for permanent and stable sources of finance.
Civil society organisations had demanded both governance reform and an end to the IMF’s damaging conditionality in exchange for any increase in resources. The International Trade Union Congress, an umbrella organisation for labour unions around the world, had demanded that "both the Bank and the IMF must stop imposing the conditionality on developing and emerging countries that pushes them in to pro-cyclical policies" as a necessary part of an increase in resources. A group of UK NGOs demanded that the UK take the lead in ensuring "any funds provided to existing international or regional institutions should go hand in hand with promises for fast-tracked reforms in the governance of the institutions."
SDR’s to the rescue?
The other massive increase in IMF resources was through an allocation of special drawing rights (SDRs), the IMF’s own internally created reserve asset (see Update 65). The $250 billion dollars of new SDR allocations was the maximum that the US treasury could support without asking for approval from US Congress.
An SDR allocation effectively means printing new money, about $68 billion of which will go to middle-income countries and $17 billion to low-income countries. As SDRs are allocated according to voting shares at the IMF, two-thirds will go to rich countries. If a developing country uses its SDRs by exchanging them for hard currency, it will pay interest charges on the balances.
Prior to the summit SDR issuance attracted the support of former senior US Treasury official Ted Truman, now a fellow at the Peterson Institute for International Economics. The US has traditionally resisted the use of SDRs, but this time Truman admits, “A one-time SDR allocation would dramatically build confidence in co-operative solutions to the global recession. It would leverage the low current borrowing costs of the major industrial countries to finance the immediate needs of developing countries experiencing a sudden disruption of normal international financial inflows.”
One key benefit of issuing SDRs is that they come without the traditional IMF conditionality that has been so problematic in recent IMF loans during the crisis (see Update 65). Previous efforts to issue SDRs fell on deaf ears in the US. An issuance of SDRs requires an 85 per cent majority of IMF member countries to approve it, meaning that the US is the only single country with a veto over such a policy. The G20 also committed to “ratify urgently” the 1997 agreement to issue SDRs to former Soviet-block countries. That agreement had never received the required support from the US legislature.
More cash, new acronym
It is envisioned that most of the IMF’s new resources will be channelled through yet another IMF facility for middle-income countries, the Flexible Credit Line (FCL), approved in early March.
The FCL replaces the failed Short Term Liquidity Facility (STLF) which was only launched in November 2008 (see Update 63). No country used the STLF, but the FCL already has two takers: Mexico, who announced interest the day before the G20 summit, and Poland, who applied in mid-April.
The new FCL includes pre-qualification instead of conditionality, meaning a country must be assessed to be a "strong performer" by the IMF before it can sign up. The FCL has no hard limit on the amount of money a country can access, lasts for a duration of either six or twelve months, and allows up to five years for repayment.
The FCL’s predecessors, the STLF and the Contigent Cridt Line (CCL), failed to deal with the problem of stigma: the fear that signing up for such a facility would spook financial markets and foster currency speculation or a sudden stop in capital flows. Only time will tell if the new FCL will solve this problem, but financial markets had mixed reactions to Mexico’s application, according to news reports.
Low-income resource bump
The G20 commitment to "a doubling of the IMF’s concessional lending capacity for low-income countries and a doubling of access limits" is un-resourced. The Fund’s concessional loans come out of a special pot of donor resources called the PRGF-ESF Trust, which currently is worth about $23 billion. The G20 countries have made no specific commitments to providing the additional $23 billion that would be needed, as this money can not come out of the NAB which will fund the increase in the IMF’s general resources.
The IMF is supposed to come up with solid proposals by the spring meetings, but NGOs are unlikely to be satisfied. Many have called for a cessation of the IMF’s current low-income lending framework because of damaging economic policy conditionality.
Gold to fund debt (relief)?
At the same time as these drastic changes in the IMF’s financing, the legislation to authorise gold sales to fund the IMF’s core activities and solve its income crisis (see Update 61) is being drafted in US Congressional committees, but may come with an added twist. The Jubilee Act, passed by the US Congress in 2008 urges that IMF gold sales be used to pay for additional debt relief in addition to administrative expenses.
The G20 seems headed in a different direction, calling for $6 billion from gold sales to be part of the doubling of the concessional lending pot of the IMF. That means the money will not fund debt relief but actually create more debt in developing countries as it is lent to the poorest nations.
“The G20 have rightly called on the IMF to devote some of the proceeds from gold sales to support the poorest countries, but the proposal needs significant improvement before the IMF meetings later this month,” said Neil Watkins of Jubilee USA Network. "IMF gold sales should be expanded and the proceeds used for debt relief or grants without harmful conditions – not to further indebt some of the world’s poorest nations."
Structural conditionality tweaked
In early March the IMF board considered a staff review of conditionality which had been called for by IMF managing director Dominique Strauss-Kahn after the financial crisis broke (see Update 64). Breaking from tradition, the paper admitted that the Fund had made mistakes: "In the past, IMF loans often had too many conditions that were insufficiently focused on core objectives."
In a surprise move the board decided to eliminate a whole category of conditionality, called structural performance criteria, despite having refused to limit the number of such conditions just one year previously (see Update 61, 59). Structural performance criteria are conditions the IMF places on borrowing countries to force them to change economic policies or the structure of the economy during the course of a loan.
However, the elimination of this kind of conditionality does not mean an end to the practice of forcing structural reform. Instead "the IMF will rely more on pre-set qualification criteria (ex-ante conditionality) where appropriate rather than on traditional (ex-post) conditionality." That will likely mean an increase in the use of ‘prior actions’, conditions that must be fulfilled prior to getting a loan rather than those required during the course of the loan. Structural benchmarks, which are not legally binding, but still force policy change, will continue to be used.
NGOs are still sceptical. Vitalice Meja from Afrodad noted: “The ex-ante approach is a clear indication that the conditionalities have been well entrenched in countries’ systems after the Fund’s decade of intervention. The current approach merely places the burden of compliance with the Fund’s economic reform programmes on the poor countries thereby making IMF look good.”
Despite the changes, the IMF is still under fire for its policy advice in crisis-hit countries (see Update 65). The changes agreed do nothing to impact the important quantitative conditions of the IMF that set fiscal and monetary targets as well as some times government wage bill limits. For example, a report prepared by the Global Campaign for Education for the spring meetings in April criticised the impact of IMF conditions on teachers wages in developing countries.
In its March paper on The implications of the financial crisis on low income countries, the IMF qualified its urging of countries to undertake fiscal stimulus. For low-income countries it says this depends on external financing: “A few countries may also have scope for discretionary fiscal stimulus aimed at sustaining aggregate demand.” The implication is of course that the vast majority of countries should not try to do what rich countries are doing, namely counter-cyclical fiscal policy.
Pending reviews for LICs
The IMF conditionality reviews focussed on overall conditionality policies and middle-income country programmes and facilities. However, the reviews of the IMF’s low-income country facilities – such as the Poverty Reduction and Growth Facility (PRGF), Policy Support Instrument (PSI), and Exogenous Shocks Facility (ESF) – are still in progress. The staff finished papers that were discussed by the board in early March, but no concrete decisions were made. The IMF expects to make changes to these facilities after a second round of reviews over the summer.
The staff had little input from civil society (see Update 64) and it is unclear how extensive future consultation will be. After the early-March board discussion the Fund continued their usual practice of briefing civil society after a decision had been taken, rather then providing staff papers in advance of the board discussion so that stakeholders could express their views to the board. The only way to push the staff to be more consultative might be the IMF transparency policy review (see Update 65) as the board could then require that staff papers be published before the board takes a decision."