Criticism of the IMF continues to mount as some crisis lending dishes out heavy conditionality. Meanwhile emerging markets have agreed to stump up the cash to refill the Fund’s coffers, but only on their own terms.
Romania, the latest Eastern European country to need a rescue package from the IMF (see Update 65, 64, 63), had a loan of nearly €13 billion ($17 billion) approved in early May. Romania’s austerity package cuts public spending by about 1 per cent of GDP per year in 2009 and 2010, and a further 1.5 percent in 2011. This is on top of a fiscal consolidation of 3 per cent of GDP that Romania put in place before the IMF programme. These cuts will be achieved by eliminating a planned 5 per cent wage increase, closing all current public sector vacancies without filling them, leaving 15 per cent of future public sector vacancies unfilled and increasing taxes on some kinds of fixed investment.
The letter of intent commits the Romanian government to safeguarding the real incomes of the lowest paid public sector workers, and investing €60 million in social protection, but this is small compared to the expected €1.4 billion in public sector spending cuts.
Iceland, which was the first country to go to the IMF in the wake of the financial crisis, has been unable to come to an agreement with the IMF to release the next tranche of money from the loan. The first review of the package was originally due in February, with a second review three months later. By the end of June even the first review had not been completed, as the new centre-left Icelandic government has been disagreeing with the Fund about how much to cut public spending.
At end June the new government presented its domestic spending package to parliament in an attempt to make some of the cuts that the previous government promised to the IMF, hoping for the first review to be completed in July. It included hiking value added taxes on food, which could potentially hurt those on low-incomes, and the Icelandic labour confederation expressed worry about the medium-term spending plans.
Another area of disagreement has been the interest rate. Immediately hiked to 18 per cent as part of the IMF package in November 2008, the central bank lowered rates back down to 12 per cent in early June. According to an Associated Press news report, “this came just one week after IMF mission head Mark Flanagan visited Reykjavik and said that it was difficult to see that ‘conditions were in place to reduce interest rates,’ and that doing so could be risky for the Icelandic krona and inflation targets.”
Furthermore, it is rumoured that the IMF lending package has been a negotiating chip in the dispute between Iceland, and the UK and Netherlands over compensation to British and Dutch depositors in a failed Icelandic bank. The People’s Voices movement, which helped topple the rightwing government in Iceland last year has started organising protests against the compensation deal, with some of their bloggers saying the IMF and EU members have been strong-arming the government over the package.
Latvia’s first review was also delayed as the government scrambled to meet the IMF’s austerity package demands, including a 10 per cent budget cut. When it was finalised, health minister Ivars Eglitis, a former doctor and leader of the largest party in parliament, resigned saying he could not accept the cuts.
Iraq is the next government lining up for a massive IMF loan, with press reports indicating it is seeking $5.5 billion.
Mixed IMF messages?
While some countries are facing hard conditions, others are receiving advice to match the IMF’s rhetoric on counter-cyclical fiscal policy (see Update 65). In May, Colombia became the third country to be approved for use of the Flexible Credit Line, a facility which provides high levels of access to conditionality-free resources, but only for countries that are deemed to already have ‘strong policies’.
Interestingly, Tanzania and Mozambique were advised to implement a fiscal stimulus; maybe the first time the Fund has recommended low-income countries to spend more. However, a forthcoming G24 policy brief argues that 30 low-income countries may have sufficient foreign reserves to finance a fiscal stimulus of 3-5 per cent of GDP and still leave more than 3 months of import coverage in cash. Of these, only three have been advised to spend more (India has also received such advice) to counteract the global recession and job losses.
Bhumika Muchhala of international NGO Third World Network called it irresponsible that the G20 gave more money to the IMF without demanding changes in policy advice and lending conditionality. “The G20′s decision to channel funds predominantly through the IMF, rather than a more diverse allocation of funds, is a narrow mechanism through which the developing countries may be imposed with the same type of pro-cyclial and contractionary policies that contributed to creating the crisis.”
Martin Khor, the director of the South Centre, an intergovernmental body of developing countries, also lamented the G20 strengthening the IMF: “Unfortunately the G20 did not insist on any IMF policy reform, but boosted its resources. This may be the most serious error of the summit.”
NGO network Global Campaign for Education was particularly worried about the impact on education spending in low-income countries. In an April report it found that “what the IMF has done since the global financial crisis took hold shows that little has yet changed in practice. LICs will benefit little from the hundreds of billions of dollars announced at the G20. They may have access to some new money, but if present trends continue, that money will come with conditions attached that actively undermine investment in education. There is an urgent need to hold Dominique Strauss Kahn to his word and ensure that a fully comprehensive review of IMF macroeconomic conditions imposed on LICs leads to real change.”
A June paper from NGO Results assessed the impact of IMF policies on health spending in Kenya, Tanzania and Zambia, finding that “IMF programmes in these countries have been unnecessarily restrictive.” US Congressperson Maxine Waters expressed concern in a Congressional hearing on the sale of IMF gold, some of which is being proposed to finance increased IMF lending to low-income countries. “The IMF may condition assistance to developing countries on austerity measures, as it has done in the past. Such measures would undoubtedly exacerbate the crisis instead of stimulating the local and global economies. I am also concerned that most, if not all, of the assistance for low-income countries will come in the form of loans, rather than grants.”
IMF resource increase
The G20’s increase in resources for the IMF (see Update 65) is only coming in drips. The G24 policy brief highlights that few of the promises made in London or after have actually resulted in new money being signed off for the Fund. Canada signed off on $10 billion and the next closest are the United States and the UK, who pledged $100 billion and $15 billion respectively.
The UK’s commitment of public money will most likely be approved without any parliamentary discussion, but in the US there was extensive debate. Commentators on both the right and left wing urged the US Senate to vote against the funding provision which president Barack Obama’s administration had amended to a defence spending bill. Mark Weisbrot, co-director of Washington-based think tank Center for Economic and Policy Research, noted that given the IMF’s track record and recent loan agreements, "throwing $108 billion at the IMF without any reforms is a mistake, and one that Americans will later regret." In the end the measure was approved, meaning that it is up to the administration to finalise the deal with the IMF.
A significant portion of the money pledged to meet the G20 commitments will come from developing countries buying the IMF’s first ever issue of bonds. The IMF announced in early July that it would issue $150 billion worth of SDR-denominated bonds, which will be sold only to IMF member governments. China has promised to buy $50 billion, with India, Brazil, Russia and South Korea each promising to buy $10 billion. Developing countries had demanded that their contributions to the IMF not be provided through existing bilateral mechanisms such as the New Agreements to Borrow, an IMF mechanism for accessing additional resources from donor countries, both because of fiscal and budgeting rules at home and because they wanted to maintain pressure on the Fund for further governance reform.
One commentator in India called it a “cash for voice gambit”, while Eswar Prasad, a former Fund staffer and now a fellow at think tank the Brookings Institution, said “temporary augmentation of the IMF’s resources through bonds rather than a direct and permanent [New Agreements to Borrow] expansion would at least keep symbolic pressure on Europe to support substantive governance reforms.”