A fully-formatted PDF version of this briefing is available.
In April 2009, the G20 group of leaders committed $1.1 trillion to combat the financial crisis, with the bulk of this being channelled through the International Monetary Fund (IMF). However, this substantial amount of resources may never be provided, and if it is, may not have the intended positive effect on developing countries. Experience so far demonstrates that the IMF is still imposing damaging pro-cyclical conditions on some borrowers, and that the finance provided to low-income countries will be too small.
Where did the “trillion” go?
Of the $1.1 trillion, $750 billion is to be delivered through the IMF. Of this, $500 billion was for new lending, while $250 billion was to be provided by an issuance of special drawing rights (SDRs), the IMF’s reserve asset.
Of the $500 billion, by the beginning of July only the $100 billion committed by Japan in February has actually been formally signed off, with the rest being only intentions or commitments. While the IMF is reporting on its level of contributions, there is no systematic follow-up mechanism to ensure commitments are met. As the G20 communiqué did not provide a breakdown of the $500 billion, it is not possible to track who has not fulfilled their commitments. Table 1 provides a breakdown based on publicly available information.
Table 1: Status of contributions towards a $500 billion increase in IMF resources
|Japan||$100 billion||Signed bilateral agreement||February 2009|
|European Union||$100 billion||Announcement only||March 2009|
Draft bill pending before House of Commons
|United States||$100 billion||NAB increase approved by Congress||June 2009|
|China||$50 billion||Commitment to buy bonds||June 2009|
|Brazil||$10 billion||Commitment to buy bonds||June 2009|
|Russia||$10 billion||Commitment to buy bonds||May 2009|
|South Korea||$10 billion||Commitment to buy bonds||May 2009|
|India||$10 billion||Commitment to buy bonds||May 2009|
|Canada||$10 billion||Signed bilateral agreement||July 2009|
|Switzerland||$10 billion||Announcement only||April 2009|
|Other||$11.5 billion||$4.5 billion signed, balance announcement only||various|
* As of 8 July 2009
IMF lending: are resources sufficient?
The $500 billion in new resources, if realised, would be in addition to the approximately $225 billion that the IMF had available from existing quota-based resources. The most recent compiled data from the IMF indicated that as of the end of May approximately $120 billion had been committed, leaving about $105 billion in uncommitted resources available for lending. This does not include the new Japanese commitment.
Developing countries and the UN commission on financial reform have called for the IMF to increase its resources through either a general quota increase or selective quota increase. These methods would permanently increase 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.” A quota-based increase would be easy for most large emerging markets to finance, as they often have large levels of reserves which could cover the costs of such an increase.
The money that has been committed will generally be lent through one of two mechanisms – the new Flexible Credit Line (FCL) or a standard Stand-by Arrangement (SBA). FCL arrangements come with no additional conditionality but are limited to countries that the IMF determines to have sound policies, meaning consistent with the IMF’s definition of macro-economic stability: low levels of inflation, fiscal surpluses or only small deficits, and significant levels of foreign reserves. So far only Mexico, Poland, and Colombia have requested and been granted FCL arrangements, which typically provide access at 1000 per cent of quota.
An important question is whether the level of resources being provided is sufficient. Under a negative scenario where many large emerging markets experience contagion and must apply for use of FCL resources, Table 2 helps demonstrate that more widespread use of the FCL among middle-income countries would not exhaust the Fund’s resources provided that the IMF receives all the additional resources it has been promised.
However empirically in most emerging markets that have experienced significant sudden outflows of capital and financial crisis in the context of contagion, the IMF’s resources would not be sufficient to meet the needs of the country. For example, South Korea’s rescue package in 1997/8 was roughly double the size of what would be available under an FCL. Under the current arrangements and limits, the IMF would not be able mount rescue packages large enough on its own and, as has been done in Eastern Europe, would need to provide joint packages with sovereign lenders.
The World Bank estimated in March that developing countries may face a financing gap of $270-$700 billion. According to an April UN estimate, the funding needed to counter the effects of the crisis may be as much as $1 trillion. And the most recent Global Development Finance report from the World Bank estimated that the financing needs for 2009 alone for just 97 countries with sufficient data would range between $352 billion and $635 billion – much more than is likely to be provided through the IMF or other G20 commitments.
Table 2: Potential size of FCL and financing needs for selected middle-income countries
|Country*||Potential FCL size||Potential high-end financing needs**|
|Brazil||$45 billion||$253 billion|
|Bulgaria||$9 billion||$10 billion|
|Chile||$13 billion||$27 billion|
|Israel||$14 billion||$40 billion|
|Korea||$45 billion||$145 billion|
|Malaysia||$22 billion||$43 billion|
|Nigeria||$24 billion||$34 billion|
|South Africa||$27 billion||$50 billion|
|Syria||$4 billion||$10 billion|
|Uruguay||$5 billion||$6 billion|
|TOTAL of 10 countries||$208 billion||$618 billion|
* Picking a sample of middle-income countries, without any indication that they are likely to need financing
** Based on rescue packages of 20% of GDP at market prices, lower than the size of the package provided to Korea in 1997/8
IMF lending: what conditionality?
A second question of interest is the conditionality policies applied to those countries that would not be able to access the FCL and would have to approach the Fund for financing under an SBA. There are two types of conditionality: structural and quantitative.
The IMF board decided in March 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. Structural performance criteria are conditions the IMF places on borrowing countries to force them to change economic policies or the structure of their 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. Indications from recent studies are that IMF structural conditionality has not decreased overall but instead shifted focus and sectors.
Quantitative conditionality is also controversial. As was done in Asia in the late 1990s, the IMF is requiring some borrowers to undertake immediate fiscal adjustment rather than allowing countries some breathing space to make adjustments after the global recession is over. For example in Hungary, public sector employees have seen salary cuts on the order of 15 – 20 per cent. Similar actions are being required of Latvia in order to bring the fiscal deficit down to less than 5 per cent of GDP despite the massive global recession. Other countries in Eastern Europe are facing similar conditionality, for example Romania is programmed to cut public spending by about 1 per cent of GDP per year in 2009 and 2010, and a further 1.5 percentage points in 2011. At the same time many countries are experiencing currency devaluations. The devaluations and cuts in public spending combined with worsening global outlooks and falling exports will worsen recessions, force more households and businesses into payment difficulties and could exacerbate short- and medium -term economic decline (see G24 Policy Brief No. 46 by Nuria Molina).
Conditionality-free facilities, as have been suggested by many parties, are needed to help provide the missing resources. Many, including the UN commission, have argued that more resources need to be made available through facilities that are not governed by the traditional governance structures of the IMF. Substantial resources are sitting with high-reserve countries who are dissatisfied with the IMF’s current governance arrangements. These countries might be convinced to make available more money without conditions if the money would flow through facilities or arrangements over which developing countries had greater authority. Civil society has argued that the value of IMF gold sales that is in excess of the expected amount at the time the decision was made, be used to finance a conditionality-free debt payment moratorium.
Use of SDRs
The other method for conditionality-free financing at the IMF is an allocation of special drawing rights (SDRs), the IMF’s own internally created reserve asset. An SDR allocation is a mechanism of global quantitative easing. Of the $250 billion promised at the G20 summit, 67 per cent or $168 billion will be provided to high-income countries. This essentially wastes two-thirds of the resources. Only $82 billion will go to middle- and low-income countries. Unlike other forms of finance, SDRs come without conditions attached, but a country must still pay interest when it uses them. The above discussion shows that the SDR allocation at $82 billion will be far short of meeting the financing needs of developing countries, particularly middle-income countries which in times of crisis can need up to 20 per cent of GDP in rescue packages because of sudden stops in capital inflows.
Given the volume of SDRs they are not likely to be significant in meeting financing needs in middle-income countries. However they might provide significant resources to low-income countries. As rich countries embark on fiscal stimulus to ensure their economies can resume growth quickly, many low-income countries are being left behind without the resources to undertake fiscal stimulus. Of the total, about $16 billion worth of SDRs will go to low income countries.
LIC fiscal space
Below we assess whether the new SDRs will be enough to support a counter-cyclical fiscal stimulus in low income countries, which Justin Yifu Lin, the World Bank chief economist, recommends should be 3-5 per cent of GDP.
While SDRs will be important, alternative ways of financing fiscal stimulus in low income countries should also be considered, including grant finance, concessional lending, cracking down on tax evasion and a debt repayment moratorium. To make an assessment we have looked at the level of SDRs to be provided, reserve levels and debt sustainability of the 78 PRGF eligible countries.1
While civil society has been critical of the IMF/World Bank debt sustainability framework because of its lack of attention to development and social needs, we use it here as a quick guide to whether the resources being provided through the IMF are sufficient. There is significant worry about a new accumulation of debt so soon after debt relief, albeit not as extensive as some hoped, has been provided.
Data collected for 70 of the 78 PRGF-eligible countries found that 36 had debt to GDP ratios of 30 per cent or higher and/or debt servicing as percentage of exports of 16 per cent or more. According to the IMF/World Bank debt sustainability framework these countries can be said to be in medium to high risk position with regards to debt, and are thus advised against significant additional borrowing in order to finance a fiscal stimulus. For these countries, SDRs, existing reserves and aid will be the only mechanism to finance a fiscal stimulus.
Of the 19 countries identified as being high risk, new SDRs will bring five within or very close to the fiscal stimulus range of 3 – 5 per cent of GDP. For four countries, while SDRs would not be sufficient on their own, their existing reserve levels would be able to finance a fiscal stimulus while still leaving reserves of greater than 3 months of imports2. For the remainder, SDRs will have very little impact since they fall well short of the recommended fiscal stimulus and/or the reserve requirements. For these countries additional resources will have be provided on grant terms. Of the 17 countries at medium and medium-high risk, the value of SDRs will match the recommended fiscal stimulus in only four with a further six having sufficient levels of reserves already to finance a stimulus. The remainder will require more resources.
Table 3: Ability of low-income countries to undertake stimulus
|SDRs can finance fiscal stimulus||SDRs insufficient but high reserves available||SDRs and reserves are insufficient, more resources needed|
|High risk on debt sustainability*||Domenica, Grenada, Guinea Bissau, Guyana and Liberia||Bhutan, Lao PDR, Mauritania, Mozambique||Cape Verde, Congo, Cote d’Ivoire, Djibouti, Eritrea, Maldives, Nicaragua, Sudan, Tajikistan, Togo|
|Medium or medium-high risk on debt sustainability**||Central African Republic, The Gambia, Lesotho, Sao Tome and Principe||Comoros, Kyrgyz Republic, Moldova, Mongolia, Tanzania, Vietnam||Georgia, Ghana, Pakistan, Senegal, Sri Lanka, St. Lucia|
|Low risk on debt sustainability***||Burundi, DR Congo, Sierra Leone, Zambia||Albania, Angola, Armenia, Azerbaijan, Benin, Bolivia, Burkina Faso, Cambodia, Cameroon, Chad, Honduras, India, Mali, Niger, Nigeria, Papua New Guinea, Rwanda, Uganda, Uzbekistan, Yemen||Bangladesh, Ethiopia, Guinea, Haiti, Kenya, Madagascar, Malawi|
* > 50% debt/GDP and/or > 25% debt servicing/exports
** > 30% debt/GDP and/or > 15% debt servicing/exports
*** < 30% debt/GDP and < 15% debt servicing/exports
There are 34 further countries that are at low risk according to the debt sustainability framework. They have the option of increasing borrowing from the IMF to finance a fiscal stimulus on top of their use of SDR allocations. Many of these countries already have high levels of reserves that could finance a stimulus regardless of the SDRs. The nine countries at low debt risk but without sufficient reserves or SDRs could make use of access to IMF concessional borrowing to finance a fiscal stimulus. Of these only two, Haiti and Malawi, have high levels of credit outstanding with the IMF which might prevent them from borrowing enough to finance a fiscal stimulus. Of course, these countries will be wary of borrowing from the Fund due to fears of pro-cyclical economic policy conditionality being applied.
Despite finding that according to the IMF’s own conservative criteria a large number of low-income countries could finance a fiscal stimulus from existing reserves or an SDR allocation, the IMF has only recommended fiscal stimulus in two low-income countries: Tanzania and Mozambique. This is despite repeated rhetoric from the IMF managing director Dominique Strauss-Kahn about the need for counter-cyclical policy.
The commitments provided to the IMF from the G20 may bring both risks and benefits for developing countries. While some countries may get access to conditionality-free resources from the new FCL, this is a small number of countries and the size of the resources may not be enough in the case of a full-scale capital account crisis. The resources will not likely be used to meet the massive financing gap faced by developing countries this year. And most countries will likely be pushed into pro-cyclical economic policies by the IMF if they attempt to access the IMF’s expanded war chest.
The IMF has not made flexibility a key element of fiscal programming in its advice for most middle- or low-income countries. Any low-income countries going to the IMF for concessional lending are unlikely to be given the room to undertake stimulus. And a large number of countries are going to need further resources beyond what the G20 has committed to making available, particularly in terms of transfers. There is scope that bilateral transfers of SDRs that are being allocated to rich countries to make up some of the gap. However they are unlikely to be sufficient. Mechanisms of releasing the resources held by high-reserve countries for the benefit of other developing countries will need to be found. That will likely require new governance arrangement or credit facilities over which developing countries have greater decision making power.
Originally published as G24 policy brief No 47 in July 2009. Written by Peter Chowla with research assistance provided by Hadiru Mahdi and Rachel Whitworth.