IFI governance


Rebranding hides little change for IMF lending

22 September 2009

By Peter Chowla, Bretton Woods Project

The IMF has launched a make-over for all of its lending to low-income countries, and while the new facilities will deliver more resources, the money seems destined to come with the usual damaging conditionality attached.

The IMF board completed its promised review of concessional facilities for low-income countries (see Update 65, 64) at the end of July. The Fund will now have three facilities for low-income countries: an Extended Credit Facility (ECF), a Stand-by Credit Facility (SCF) and a Rapid Credit Facility (RCF).

a mere smoke screen for continuing in the same failed policies

The ECF is merely a replacement for the existing medium-term finance provided by the IMF under the Poverty Reduction and Growth Facility (PRGF). The PRGF itself came about as a result of the 1999 rebranding of the Structural Adjustment Facility (SAF) which faced persistent criticism over its heavy conditionality. However, the ECF changes none of the substantive policies of the PRGF, continuing with the so-called upper credit tranche conditionality and the same terms, maturities, and recently raised access limits. Perhaps to make up for removing the words poverty reduction from the name of the programme, IMF press releases and background notes were careful to stress “the centrality of countries’ own poverty reduction and growth strategies”.

The SCF is a new lending window that was created to help mirror the structure of facilities available to middle-income countries. It will allow “precautionary programmes”, meaning agreements with country authorities that do not necessitate any actual lending, but which can provide financing if it becomes necessary. The SCF will complement the Policy Support Instrument (PSI), a non-financing facility the IMF created for countries that wanted the Fund to publicly back its policies but did not want to borrow. The SCF will be more like traditional balance of payments support as it has a relatively short duration and will carry typical IMF conditionality.

The RCF will replace a number of existing facilities that provided quick-disbursing financing after economic shocks, emergencies and natural disasters. This includes replacing the recently-reformed Exogenous Shocks Facility (ESF, see Update 62), which was the first IMF concessional financing without heavy conditionality provided to low-income countries for economic problems. The rapid access component of the ESF made available finance up to 25 per cent of the ESF programme limits without any conditionality. This design feature has been retained in the RCF, meaning some money will be available without conditionality. However higher borrowing will now require countries to go to the SCF and subject themselves to tight conditions.

However, the changes will not go into effect until there is universal agreement from the donor countries that contribute money to support concessional lending. Their agreement is expected to be finalised around the time of the annual meetings in Istanbul in early October.

Lidy Nacpil, the coordinator of the Asia Pacific Movement on Debt and Development, was sceptical of the changes, claiming that it seemed like little more than name changing: “All the press releases and announcements were a mere smoke screen for continuing in the same failed policies that force countries to eliminate public services and load up on debt.”

Donors asked for cash

At the same time that the facility configuration was announced, the IMF released its estimates of new lending to low-income countries for the next five years, saying that it could lend up to $4 billion a year to low-income countries in 2009 and 2010, with a further $2 billion annually through to 2014. Comparing the estimates to the $1.2 billion lent in 2008, the IMF says it is “exceeding the G20 call for additional lending of $6 billion over the next two to three years.”

The changes will also unify the underlying financing pool by combining previously separate trust funds into one single Poverty Reduction and Growth Trust (PRGT). To meet the expected lending commitments, the IMF said it will need to increase the amount it can borrow from rich countries by $10 billion and find additional grant resources of $2.4 billion to subsidise the concessional loans. The subsidy money will come from four sources: the IMF’s general resources account, a reserve fund, bilateral contributions, and gold sales. Respectively this means the money will come from middle income country loan repayments, past low-income country loan repayments and investment returns on them, rich country aid budgets, and the IMF’s gold holdings.

The last of these sources has received lukewarm support from civil society organisations. In a letter to IMF executive directors in July, eight NGOs urged that finance be “provided on non-debt creating terms in order to help ease growing debt distress levels of low income countries. The IMF should devote some of the fresh resources it mobilises for LICs to support a moratorium on all debt service payments (principal and interest) for low-income countries affected by the crisis.” The IMF expects to raise around $600 million worth of contributions from donors, diverting this money from their aid budgets.

The cost of subsidy went up slightly because of an additional reform – a temporary reduction of the interest rate on IMF loans to low-income countries from 0.5 per cent to 0 per cent through 2011. However, an NGO briefing from ActionAid, Bretton Woods Project, Eurodad and Third World Network complained that this was a paltry amount. The authors estimate that the interest reduction is only worth approximately $110 million over the next two-and-a-half years for about 60 countries, meaning on average less than $1 million annually per country.

Nothing on SDRs

The reform announcement said nothing new about the allocation or use of special drawing rights (SDRs), the IMF-created reserve asset (see Update 65). As SDRs are allocated according to IMF voting rights, low-income countries stand to get less than $20 billion of the $250 billion worth of SDRs that were doled out at end August.

A constellation of NGOs, developing country governments, and academics such as those serving on the Stiglitz commission (see Update 65) have argued that SDR allocations should take into account need, and that at the very least a mechanism be put into place so that the nearly $170 billion worth of SDRs being allocated to rich countries could be reallocated or transferred to developing countries. There was no agreement on this at the board, despite reports that France and the United Kingdom had pushed for this to happen.

The latest plans are that rich countries might now lend their SDRs back to the IMF so that they can be loaned on to low-income countries through standard IMF packages. Soren Ambrose from the Nairobi office of international NGO ActionAid was unconvinced: “This move twists a good idea for transferring resources from rich to poor into a method for increasing the IMF’s power over low-income countries. It would essentially take un-conditioned resources and convert them into new conditions and new debt.”

Conditionality still the problem

What many civil society organisations view as the real need for reform was not addressed: austerity conditions attached to IMF loans. In late September, the Global Campaign for Education (GCE) released an updated policy brief on the impact of Fund programmes on education spending (see Update 66). “There are signs of greater flexibility on deficits, but it seems to be very temporary – only for the year 2009. The flexibility on inflation is also temporary, as it is expected to go back down quite drastically in most countries to 5-7 per cent by 2010-11. There is no sign of greater flexibility on wage bills.”

While the IMF has claimed that it is protecting social spending, the GCE briefing finds that “protecting education budgets all too often means freezing them – and that is effectively a cut for countries that have young populations and rapidly rising enrolments.”