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Conditionality

News

IMF economics put recovery at risk (not to mention people)

29 November 2010

Amid slowing global economic growth the IMF welcomed fiscal consolidation, despite warnings that in Europe and in developing countries austerity policies and consumption taxes are threatening recovery and harming the most vulnerable.   

Ireland is the latest country in Europe facing IMF intervention in its economy. In late November, the country was the first to call on the European Financial Stability Facility, agreeing a three-year bailout package with the European Union and the Fund. The deal is expected to total between €80 billion ($110 billion) and €90 billion and is intended to tackle the country’s banking crisis and fiscal problems. Ireland’s budget deficit is expected to hit over 30 per cent of GDP this year, while its banks have taken €130 billion in funding from the ECB. The Irish government is finalizing an austerity plan to save about €15 billion, but brokers suggest the banks alone need €50 billion to survive. Nessa Ní Chasaide of NGO Debt and Development Coalition Ireland said: “It is clear that the EU-IMF loans are not to bailout the Irish people but European banks, which lent so recklessly to Irish banks, and to prevent contagion of Ireland’s crisis across Europe.” 

While the conditions attached to Ireland’s lending programme are being negotiated, a late November IMF staff position note, Lifting euro area growth, identifies cuts to the national minimum wage and unemployment benefits as a priority for Ireland’s economic recovery.

Despite massive cuts of public sector jobs and wages, Greece failed to meet the deficit target set by the EU and IMF (see Update 72, 71). The EU’s statistical agency projected a 9.4 per cent deficit this year, breaching the 8.1 per cent target. The Greek economy shrank by 4.5 per cent in the last 12 months and in early November speculation was rife that Greece would ask for a rescheduling of debt repayment beyond 2015. Costas Lapavitsas of the University of London said that “the austerity programme in Greece is failing. With further cuts announced for 2011, the recession is likely to become even deeper. Meanwhile, public debt will probably exceed 140 per cent of GDP in 2010, and it might even reach 180 per cent in a few years. This is a disastrous prospect, which makes default almost inevitable. Greece needs to get out of the IMF-EU austerity programme as soon as possible.”

Opposition is growing against the Romanian government’s IMF-mandated consolidation policies (see Update 72, 69, 68, 67). The IMF’s mid October mission to Bucharest was met by 4,000 finance ministry workers striking against wage cuts. The IMF delegation urged the government to resist union demands for increases to the minimum wage, which currently stands at less than €150 a month. The mission welcomed the rise in value-added tax (VAT) for staple food to 24 per cent, which Romania adopted during the summer, and cautioned against any changes in the fiscal system in the near future.

In Latvia, the centre-right government was re-elected in early October. Under the country’s programme with the IMF, the coalition has pushed through some of the toughest austerity measures in Europe, including public wage cuts averaging 30 per cent while unemployment has hit 20 per cent of the working age population. Plans by Latvia’s finance minister to reduce the deficit even further are based on IMF recommendations to transfer the tax burden from income onto consumption and reform the current pension system. The World Bank has expressed concerns about Latvia’s low health and education spending. In a mid October public spending review the Bank remarks that “there is little, if any, room for further reductions in the budgets for health and education. … The health sector and the education sector have borne the brunt of fiscal adjustment in the 2009 and 2010 budgets”(see Update 69).

A fight may be brewing in Iceland over a government proposal in Reykjavik to restructure private debts, aimed primarily at preventing 39 per cent of householders from losing their homes. The mid November statement of the concluding IMF mission to Iceland notes that “more time is needed to assess the impact of new measures under consideration to facilitate household debt restructuring.” Iceland’s fourth IMF review would release a $163 million tranche.

Dangers in low-income countries

The challenges emerging from the global crisis for low-income countries were discussed by the Fund’s board in early November. Despite noting that low-income countries "saw the sharpest decline" of their economies in four decades, “pushing an additional 64 million people into extreme poverty by end 2010”, the board praised their “resilience” and found GDP growth to have “stayed positive” in two-thirds of the countries during the crisis.

The report identifies the importance of rebuilding “policy buffers”, mainly the reduction of fiscal deficits, to be the priority for low-income countries “emerging from the global crisis” (see Update 72). While the IMF projects that poor countries will maintain or even increase public expenditure, civil society groups have critiqued these estimations being measured in real terms, rather than in relation to GDP. Bhumika Muchhala of Malaysia-based NGO Third World Network says: “This makes a difference because, considering all impacts of the crisis, including external trade shocks, the financing needs of LICs also mounted.”

An early October UNICEF report, reviewing expenditure in 126 developing countries, raises concerns over fiscal adjustment timing and measures such as wage bill reforms, removal of food subsidies and targeting meagre social protection systems. The identification of possible adjustment measures considered by governments is inferred from policy discussions contained in IMF country reports, which cover Article IV consultations, reviews conducted under lending arrangements and consultations under non-lending arrangements. In the light of “a significant number of low- and middle-income countries … tightening or planning to tighten public expenditures in 2010-11”, UNICEF worries that “the adjustment measures that countries choose to achieve expenditure consolidation can have direct implications for social spending and the poor”, risk achievement of the Millennium Development Goals, and “impede sufficiently broad-based domestic demand to ensure employment-oriented growth”.

In a late October letter, international NGO Oxfam expressed concern to the IMF about its lending programme in Sierra Leone (see Update 69). The Fund pressured the government to prevent increases in health workers salaries after Sierra Leone launched a major initiative to provide free basic health care to pregnant and nursing mothers and children under five years old. Moreover, the IMF recommended the adoption of a consumption tax. Oxfam worries that the Fund’s recommendation fails to “identify risks associated with the tax’s implementation, including risks to Sierra Leone’s highly food insecure, vulnerable population.”

Cheerleading cuts universally

While the IMF’s October World Economic Outlook projects economic growth to slow in 2011 and expresses concern about the “fragility” of global economic recovery, its early November Fiscal Monitor reveals that public budgetary consolidation is well underway. In 2010, 60 per cent of the countries surveyed had reduced their fiscal deficits and 90 per cent are planning to do so in 2011. The report comments that “this pace of adjustment is broadly appropriate” and welcomes that "the vast majority of adjustment plans are intended to be expenditure-based,” which means deficit reductions will be tackled by public spending cuts rather than by substantially increasing the tax base.

The report criticises the fact that “in many cases detailed adjustment measures have not been identified” and remarks that health and pension systems will need “comprehensive reforms … to contain medium and long-term spending pressures in this area”. Specifically, the analysis recommends “a two-year increase in the retirement age” and “eliminating preferential rates” of value-added taxes in advanced economies, usually employed on basic goods like food.

In contrast, the International Labour Organisation’s World of Work Report 2010 cautions that if policies of fiscal tightening persist, a recovery in unemployment to pre-crisis levels will be delayed until 2015 in advanced economies, instead of 2013 as projected last year.