The World Bank and IMF response to the food crisis

Will lessons be learned?

26 September 2008

By Nuria Molina, Eurodad and Bhumika Muchhala, Bank Information Center

Although conditions attached to food and fuel crisis lending are somewhat lighter, the Bank and the Fund should turn the crisis into an opportunity to learn that finance can be granted without the usual strings attached.

At the Food Summit in Rome last June, world leaders pledged to “eliminate hunger and secure food for all, today and tomorrow”. Today is quite a tight deadline. According to the UN World Food Programme, $755 million is required to immediately address hunger. But $15 – $20 billion would be needed to implement measures to resurrect the hollowed-out agricultural sectors of low-income countries.

The World Bank came up with the Global Food Crisis Response Programme (GFRP) in May (see Update 61), which will fast-track up to $1.2 billion of the Bank’s resources within the next three years; while the IMF has revamped its Exogenous Shocks Facility (ESF) and temporarily scaled up loan amounts to poor countries. However, IFI money almost never comes without policy conditionality and despite the magnitude and urgency of the crises, the Bank and Fund continue to dictate policies to developing countries.

Loosening conditionality?

The GFRP is partly financed by the newly established World Bank food price crisis response trust fund – using a transfer of Bank income (from the IBRD) – which is intended to “provide rapid assistance to the most fragile, poor and heavily-impacted countries.” It has already approved loans for fifteen countries including Djibouti, Liberia, Haiti, Afghanistan, Sierra Leone and Niger. The rest of the programme is resourced with funding from a multi-donor trust fund. The vast majority of these operations are provided as grants. There is yet more good news: in general, the operations approved tend to have a very light conditionality framework.

A new development policy operation, a standard form of bank lending, for Djibouti approved in May contained only two policy conditions requiring the elimination of taxes on basic food items and an action plan to channel direct support to poor households – neither of which are particularly controversial. Policy matrices for new operations in Sierra Leona or Burundi are very similar. In cases when the Bank is topping up existing loans – such as Honduras, Liberia or Madagascar – no conditions are added. However, conditions attached to the existing loans do need to be fulfilled and no waivers are extended given the new circumstances.

New operations run in parallel with recent loans which may contain conditions which could be deemed sensitive. In Burundi, for example, an April loan required the privatisation and liberalisation of the coffee sector, a condition which will still have to be fulfilled despite the crisis.

The majority of operations approved are investment loans, provided on grant terms. They are intended for specific purposes, such as purchase of key agricultural inputs (seeds, fertilizers); funding safety nets (school feeding or cash transfer programmes); or compensating revenue lost by reducing taxes or import tariffs. These operations do not have conditionality attached, but include exhaustive guidelines on procurement (related to the purchase of the goods they are intended for) and often suggest changes to government policy.

The looser conditionality frameworks are due to the emergency situation not a trend towards loosening the institutional grip over poor countries. And investment loans do not necessarily increase the policy space available for recipient countries. The question remains whether countries will have the freedom to determine their own agricultural models (see Update 58)in order to secure food sovereignty.

IMF traditional recipes

Since April, the IMF has been warning that the gains made by developing countries in the last decade could be “totally destroyed” by the food crisis. In an early July seminar, IMF chief Dominique Strauss-Kahn urged for a “broad cooperative approach” and assured that the Fund would respond through all three of its primary mechanisms: policy advice, technical assistance, and lending. However, at the G8 summit in Japan, Strauss-Kahn persuaded leaders that “inflation should be the top concern of policymakers confronted by higher food and fuel prices,” not food security or meeting immediate needs through public spending.

The IMF’s advice, spelled out in its end-June policy paper on the food and fuel crises, offers a distinctly free-market recipe for fiscal, monetary and trade policies. According to the IMF, the pass-through of food and fuel price increases to higher domestic prices is “ultimately unavoidable”. The Fund’s economists repeatedly underscore the importance of phasing out subsidies, reducing taxes and aligning public sector wage increases with that of the private sector. Recognising that such steps would intensify economic burdens on the poor in crisis-hit countries, the Fund argues for targeted social safety nets to protect the most vulnerable.

The Fund’s monetary policy advice for low-income countries says that when “policy credibility” still remains to be established and inflation targeting is still nascent, the risk of losing growth and stability by hiking up interest rates is well worth taking. This is because the cost of “lower credibility if inflation objectives are missed” might be even greater than that of economic loss. This is consistent with the Fund’s historical role in orchestrating the liberalisation of fuel and food imports, as it advocates that the global food market be kept open, export restrictions and taxes be avoided, and food production be boosted.

While some anticipated “a deluge of new business,” so far the IMF has only increased lending to existing customers. Loans to low-income countries through the Poverty Reduction and Growth Facility (PRGF) have been augmented for 12 countries, most of them in sub-Saharan Africa. Conditionality on the fiscal deficit, long criticised for constraining public spending needed to meet the Millennium Development Goals and limiting long-term investments in health and education, has been loosened to allow public spending for food. However, these are temporary flexibilities and are unlikely to signify a long-term change in the Fund’s macroeconomic conditionality.

The promised review of the Exogenous Shocks Facility (ESF) which was scheduled for June (see Update 61) took months to materialise. The ESF, which is supposed to provide rapid and accessible concessional support during sudden external shocks, has not been used since its inception in 2005 despite this year’s food and fuel crises. The executive board discussion on the ESF was delayed to late August, and then mid-September amid rancour in the board.

Under the agreed revision, the first quarter of funds available from the ESF would carry little or no conditionality, but anything above that limit would carry conditionality and programme modalities that mimic that of the PRGF such as IMF field missions, negotiations with finance ministers and letters of intent. Conditionality is supposed to be limited to directly addressing the price or economic shock the country is facing, and should not extend to other areas of economic policy. According to an executive director from a developing country, ESF process modalities “do not respect the urgency of the commodity crises … when it follows that of the PRGF“.

NGOs from developed and developing countries wrote a letter to the board demanding that policy conditionality be eliminated from the ESF; access amounts be decided by country authorities; and that concessionality be increased. The lack of transparency and opportunity for input into the review by external stakeholders was also highlighted in the letter.

Learning from mistakes?

If the IFIs want to advertise their emergency financing as a quick fix to this crisis, they need to give clear indications that they acknowledge their past role in pushing food and fuel import liberalisation and reduced investment in non-export agricultural sectors in developing countries. These critiques have been the focus of NGO analysis of the food crisis, with publications being issued by Third World Network, Focus on the Global South, ActionAid International, and FoodFirst Information and Action Network (FIAN), among others.

The Bank deserves some credit for quickly providing finance in grant terms and with a reasonably loose conditionality framework. Hopefully the Bank will turn the crisis into an opportunity to learn that finance granted without strings attached can be a more effective to contribution to poverty reduction. While the Fund may be congratulating itself for the macroeconomic flexibilities it is injecting into existing PRGF arrangements, the lack of any overarching changes to its conditionality framework challenges hopes that it will change its “business as usual” approach to developing countries.

The Fund and Bank both need to assure critics that their new development finance will not contribute – as it did in the past – to undermining food security and agricultural sustainability in low-income countries. It is still too early to assess the effectiveness and impact of the Bank and Fund operations, and whether these lessons have been learned.