An IMF for the 21st century – the low-income country perspective
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Presentations
Ray Offenheiser – Oxfam
- G20 has put IMF at centre of response to global economic crisis
- Basic questions being asked – what would a 21st century ‘fit for purpose IMF look like? What about in low-income countries?
- IMF will be crucial to helping LICs spend the billions of dollars needed to help reach the MDGs
- Increased flexibility on the part of the IMF has been welcome, but this appears to be unravelling
- In particular messages in World Economic Outlook – suggesting Africa has weathered crisis are wrong.
- IMF needs to:
- Work harder to push aid to work at national level
- Better analysis of impacts of IMF programmes needed
- Conditionality still a worry – e.g. pushing for regressive taxes
- Should be able to give grants rather than loans
Dominique Desruelles, IMF
- LICs went into crisis with higher growth and lower fiscal deficits, smaller debt, lower inflation than e.g. during 1990s
- Crisis led to around 2% GDP fall in revenue for developing governments
- Unlike previous crisis, countries have had room to increase expenditures – Keynesian counter-cyclical response possible (same as for advanced and emerging market countries.)
- This was possible because of improved economic situation but also because of access to finance:
- IMF scaled up concessional financing ($3.8 billion last year compared with normal average of $1 billion) with low interest rates
- SDR allocation – $ 80 billion for LICs ???? out of $250 billion
- Important for them to have buffers to absorb shocks – no rapid fiscal tightening, but then return to reducing the fiscal deficit
- How to ensure expenditure for development? More can be done mobilising additional resources – aid, new actors e.g. China, India, plus countries will have to boost their own domestic resources for their own needs.
- VAT does not impact poor – mostly middle class who buy from shops who charge VAT
- Massive infrastructure gaps
- Some of these needs will have to be met through credit.
- Need to make sure that ‘high quality’ projects selected – with high financial returns.
Dr Samura Kamara – Minister of Finance, Sierra Leone
- Personal view – not the position of the Sierra Leonean government
- SL is a post-conflict country, with a strong potential in resources, but one of the poorest countries in the world – both in terms of human development & capacity to grow
- SL did not suffer first round effects of the financial crises – no bank closures etc but the food, fuel and financial crises hit and experienced a ‘double whammy’ – not able to achieve high levels of growth (still hovering around 6-8% per year) + sharp drop in exports, remittances (affected domestic banking system) – had to revise growth rates to 4-4.5%
- During the post-crisis, benefited from new IMF instruments that came up, and increased flexibility and speed. Greater fiscal space was allowed. But still had to cope with the structural problems – developed agenda for change, the second PRSP, based on high sustainable growth rates and human development.
- At 4th review of PRGF SL fiscal space was low – unable to borrow from domestic banking system. Important to maintain macroeconomic stability.
- Had to turn to donors, much of these resources came late. Had to fill in the gap with borrowing from private sector and central bank monetary support – this was bad for macro-stability, increased inflation.
- Question is what kind of relationship so we need with IMF – don’t want high volumes of development resources, this is not the mandate of the IMF.
- Fundamental reform of IMF needed – must be strong and flexible in policy advice with listening capacity.
- For example cannot really increase taxes – puts pressure on the few people who can pay tax.
- What kind of fiscal incentives are needed to incentivise investment? Balance good responsible private sector plus effective government.
- Participated in consultation organised by UK as chair of the G20 in 2009.
- IMF needs to emphasise the human development aspect in addition to macroeconomic stability.
- Problem of IMF is not about resources – their income model has improved significantly (!) – point is to make the resources more adaptable to support the requirements of LICs. Need to meet not only the usual Balance of Payment problems, but broader issues.
- Counter-cyclicality is the key word – this is exactly what developing countries need, the question is at what level.
- Private-Public-Partnership important, but easy for differences in power to subvert – private partner can dominate.
- The desired growth rate should be in the high teens for a country like SL – we and other LICs have not emerged from the crisis. 4% growth is not what is needed.
Matthew Martin, Director, Development Finance International
- During the Asian crisis, the IMF’s response was that countries had to cut back in response to the crisis – we’ve come a long way since then with the Fund saying ‘you must not cut back.’
- Research DFI did for Oxfam examined 43 LIC budgets in detail.
- There are three crises – food, fuel, and finance. When they hit, must remember that most countries were way off the modest targets of the MDGs
- Main message for IMF is that it doesn’t retreat to its pre-crisis attitude – pushing fiscal rectitude etc rather than recognising
- African countries lost $52billion in 2008 – 10% of their revenues – and $12billion in 2009. Half will still have revenues below pre-crisis levels – the crisis is still there.
- What did countries do?
- Some increased taxation (didn’t have choice due to lack of other finance) – mostly consumption taxes, which are regressive for those who pay tax. Yet most MNCs investing get massive tax breaks, plus tax havens help companies avoid tax. LICs have improved revenue collection, but really it’s the international sources that need to be focussed on.
- Countries with IMF programmes were able to increase spending – why? Because donors were persuaded to provide a bit more money. But during 2008, only 13% of fiscal funding gap was filled by grants – pretty pathetic.
- Countries had to get international loans, but this was in a similar order to grants
- So above all had to borrow on domestic markets – more countries now have domestic debts bigger than international debts
- Plus reserves were run down where they existed.
- International community’s response was slow and inadequate. E.g. G20 commitments took until second half of 2009 (later in case of World Bank) to be delivered on.
- IMF has also not loaned 2/3 of the money it was given. Why? Resources not tailored to need, but to IMF quota, plus IMF conditionality is sufficiently restrictive to put countries off going to it unless they have to. Need further reform on both these areas.
- Some increased spending particularly in 2009, most was related to spending to attack poverty. Health and education spending did quite well, other sectors were volatile – agriculture and investment – and other areas were neglected e.g. social protection spending has fallen. Lack of social protection programmes in LICs is a damning indictment of the international community.
- In 2010 position seem to be reversing – half of African countries with IMF programmes planning spending cuts, ¾ LICs outside Africa
- Spending is still lower than intended pre-crisis levels to reach the MDGs.
- Fund should be in ‘permanent crisis mode’ for LICs – always will be vulnerable
- Refreshing to hear the IMF pushing for fiscal stimulus
- Need more fiscal stimulus in coming years
- Plus permanent resources, preferably grants
- IMF does provide long term development finance e.g PRGF – 10 year repayment period.
- Permanent counter-cyclical mode. Biggest ‘shock’ to economy in LICs is the level of poverty.
Questions from the floor
- Donor countries have not met their aid commitments
- How to ramp up social spending
- IMF and others were too slow to respond in Sierra Leone – more detail? Where could the IMF be doing more.
- Does the IMF have an exit strategy for LICs
- What does the IMF mean in terms of ‘unwinding fiscal easing’ and when would be ‘premature’?
- An insurance programme at the IMF for donor promises?
Matthew Martin
- Yes, donors have not met their commitments. But donors need to be convinced that money is needed and can be spent – IMF should give this signal
- Need capital and current expenditure to keep going during crises.
Samura Kamara
- Late arrival of resources not a problem for the Fund – the problem for the IMF is the spread of thin resources over a longer period – IMF quota shares restrict the amount that countries can borrow. Should be able to increase this, front load this etc. The IMF has plenty of liquidity.
- Fund should focus on the lending function – should remember that programmes that help countries to grow will mean the Fund won’t lose anything, but the size of resources available is tiny.
- For example introduced a subsidy in response to the fuel price crisis – would have been riots without this – want to reduce this, but can’t at the moment. Hence there is need for resources to do this.
- In the real world – there is fire fighting and long term development to balance.
Dominique Desruelles, IMF
- Structural conditionality – most of the conditions are about improving spending, public financial management etc.
- Budget numbers and actual outturns can be different – important to compare like with like. Believes that spending in 2010 will not be cut.
- Gradual response would mean a similar amount of expenditure in 2010 compared to 2009. Hopefully a rebounding of revenue.
- Would need to discuss increased lending limits with shareholders.
- Difficult for donors to adapt quickly because monetary allocations are made as part of annual budget cycles – why it’s important for the IMF to respond quickly.
