IFI governance


IMF crisis response- discussion

25 April 2009 | Minutes

Soren Ambrose – AAI

IMF has become centre for global response to crisis – question is how much and in what form will the money promised to the IMF at the G20 get to low income countries?

Nuria Molina – Eurodad

Preliminary findings from Eurodad research on Exogenous Shocks Facility (ESF) – aim was to see whether low income countries under IMF programmes followed new thinking on the need for fiscal stimulus. Examined 9 loans.

There has been some change; greater flexibility in some cases, and greater policy space in some areas. But main concerns are that even though in public discourse the IMF calls for greater flexibility and fiscal stimulus, this new thinking has not followed through to low income country loans.

Most IMF programmes for LICs have tight fiscal conditions – budget deficits below 5%. Concerns over structural reforms. There has been change and some progress for example in March, one type of structural conditions was phased out. There are still controversial structural reforms in IMF programmes for LICs. Less privatisation and liberalisation than in the past, but still programmes contain, for example provisions to lower tariffs etc

Tax reforms – mixed picture. Some aim at strengthening VAT systems, not the most progressive type of tax policy.

Budget deficits – aware that fiscal space is linked to the resources available. Main concern is that assessment of needs for spending on basic social services and in other economic sectors are not mainstreamed. We are not calling for the IMF to provide more resources. Instead when the IMF is working with LICs to develop their macroeconomic framework, they should build in needs, and can have a useful signalling role to donors and others about the needs that LICs have.

On tax policy important for the IMF to step back and provide greater space for other institutions to provide advice.

Bhumika Muchhala – Third World Network

IMF has been reinforced and reimpowered compared to a few years ago. G20 has trebled resources and reinforced its role as key lending institution. $50bn in loans so far. 9 standby arrangements (SBAs) since Nov 08.

SBAs make up the bulk of the IMF’s lending portfolio – usual response to financial crisis and balance of payment problems for low income and middle income countries. Repayment due within 3.25- 5 years of disbursement – rapid.

Unlike Flexible Credit Line, SBAs carry macroeconomic and structural conditionalities. The current crop of loans include the highest loans ever disbursed by the IMF. Some greater flexibility in SBAs, but depends on how stable the IMF believes countries policies are.

Have examined the 9 loans. Preliminary assessment reveals that the IMF continues to impose pro-cyclical policies. A survey of the loan objectives shows that the Fund’s main concern is macro stability, which is linked to a ‘tightening of fiscal and monetary policies.’ Other objectives appear sensible, but the central goal is to secure investor confidence – in particular foreign investors. This reassures IMF creditors that the loan will be honoured.

IMF recognises that its programmes facilitate other donor funds, and reduce uncertainty for international investment community.

Fiscal policies – centred on reducing fiscal deficit and reducing current expenditures as a percentage of GDP. Fiscal consolidation plans are main vehicle – a set of measures to constrain and reduce public expenditure. Such as tax reforms or increases, reduction in subsidies, increases in utility tariffs, reducing public wages, capping pension payments etc. Increases in social safety nets in some programmes do not make up for the cuts in public expenditure.

Key recommendations

– Counter cyclical fiscal policies that boost public spending and investment are also needed in LICs – IMF should not be advising LICs to tighten fiscal policies. More fiscal policy space needed.

– Need to be international efforts to enhance ability of middle and low income countries to undertake fiscal stimulus. Compensatory financing schemes as well as ODA are needed.

– New global reserve system needed through greatly expanded Special Drawing Rights – outlined by UN Commission of Experts. Just requires political will.

– Also need substantive policy reforms to be implemented by the IMF before its resources are augmented.

Christian Mumssen – IMF

Not much to disagree with in the previous presentations. Agree that every country has right to counter-cyclical policies. IMF has been in the forefront of calling for global fiscal stimulus for all countries. Important for LICs to maintain or increase spending on vital infrastructure and services. Question is how to do this where there is no money.

Will focus on PRGF and ESF facilities and LICs. IMF does support larger fiscal deficits in general. Whenever there is programme in place, have factored in larger fiscal deficits. Started happening in 2008. Will be a further relaxation of policies this year. In favour of letting automatic stabilisers work, but question is how to do this when finance is constrained. LICs have limited ability to borrow or to undertake quantitative easing. LICs usually only have domestic borrowing or aid – this is why more external financing is needed.

Aim of scaling up IMF resources is to help prevent drops in expenditures. But IMF is small player in low income countries, compared to for example to World Bank. Aim to triple IMF resources for LICs over the next 3 years. Necessary as demand is rising very rapidly for new PRGFs, PRGF augmentation and ESFs.

SDRs – (see Update 65) Biggest beneficiary is US by far. LICs will get about $19bn.

Fiscal deficits – commend Eurodad for starting this work, as it’s important to have dialogue on policies in LICs. Have found that in about 80% of African countries, fiscal targets have been relaxed – this makes sense in a time of crisis. Not all programmes are in the public domain – usually takes a month after the board meeting. Depends if you look at absolute level of the deficit or the relative changes compared to original plans.

In almost all African countries, IMF is relaxing fiscal targets, even though they all remain below 5%. Must look at what financing is available, and also what was planned in the PRSP. It’s the loosening of targets that matters, not the absolute level.

Must remember that increased borrowing will result in debt crisis in the future.

IMF in favour of countercyclical responses and protection of public spending. Challenge is for international community to provide financing needed to do this.

Review of financing facilities for LICs

Aim to make facilities more flexible. Make ESF apply to more cases. Like to broaden support to fragile states, post-conflict countries. Increasing access limits.

Chapeau paper went to the board on March 20. Should follow up with CSOs.

Questions and comments

– Agree that need more assistance for LICs. Should look at IMF gold sales as a means of providing this. All of IMF money is in the form of loans. Need to acknowledge that LICs had nothing to do with the crisis – shouldn’t poorest countries be given grants rather than loans? G20 proposed using $1bn of gold sales to leverage $6bn in lending. Better to use $5bn of the gold sales for debt relief of the $10bn that will be raised. Could expand debt relief or debt service relief. US Congress very keen on this. Other ideas in Crockett report to raise money.

– IMF says different things to different audiences on stimulus issues. DSK has said that first priority for countries was to limit repatriation of capital – stimulus a secondary priority. Concessionality in IMF programmes dropped from 48% in 1987 to 28% today. What is the discussion about changing this?

– What will IMF do in countries that are in real problems.

– Is there a massive programme of retraining of IMF staff given that – based on IMF rhetoric – the policy framework has changed radically from past IMF policies?

– Only one country aiming to increase expenditure.

IMF response

Gold sales agreement was intended to make IMF independent of lending operations for administrative costs. True that gold price has risen, but the Board did not agree on the Crockett report gold price assumptions.

IMF loans are better than grants – aim is to limit decline in expenditure as income falls. Loans are better than grants for this. Grants may be better for each country, but in reality there are a limited amount of IMF resources. For a given amount of IMF funds, can either give a small number of grants or a large number of subsidised loans. IMF is an organisation that fights fires, fills short term gaps. Loans allow them to do this on a large scale and over the longer term. Everybody else except for the IMF should give grants.

IMF lending rates stay the same, but as interest rates have fallen globally, IMF loans are not as attractive as previously. But some countries have little access to other lending avenues. Could argue that in times of crisis could look at IMF interest rates again.

IMF limits to borrowing are a good idea to avoid debt unsustainability, but of course there are trade-offs. Intention is to make this more flexible, look at country situation.

Limited choices for countries running out of reserves. Want to avoid too much disruption. IMF working actively on this in a few countries. All issues will be on the table, as these are not easy situations.

IMF staff – didn’t exist during great depression; don’t have a counter factual. Don’t think IMF has advocated no counter-cyclical response in the past. On LIC side, thinking has changed. Still believe that budgets have to add up, untargeted subsisides are bad etc. But country tailoring and listening to countries and acknowledging there are different means to get to same goal. In some countries the country wants lower spending on teachers, and it’s the IMF who is pushing for more spending. PRSP process helps to give IMF an anchor. Ensuring that programmes allow for policy flexibility. Main objective is to ensure long term growth and no crisis in the nesar term; think IMF is more flexible now. Probably different from how IMF was 10 years ago. INternal coursese focussing on outreach.

TWN response

IMF signalling – critical role of IMF. Could subvert power of signalling to allow, for example higher public spending and fiscal deficit in times of crisis – IMF could give guarantees to investors.

Look at experience of Malaysia, which implemented capital controls, and didn’t suffer as bad as other countries. IMF could signal that temporary intermediate or varied capital controls in times of crisis can be warranted.

Mandate of the IMF should not be development – should be limited to liquidity in times of crisis. Get out of longer term development assistance and conditionality.

Eurodad response

Debates have changed a lot – able to have discussion now rather than violent disagreement. Question is can an institution like the IMF undertake the scale of changes necessary to respond to the crisis.