IMF at MDG summit: Poor countries should spend less, not more

30 September 2010

While the IMF has focussed on its mandate review (see Update 72) and governance reform (see Update 72), its policy towards low-income countries (LICs) has taken a backseat. NGOs are worried that the IMF has returned to promoting fiscal austerity and constraining the investment needed to reach goals on poverty.

The most detailed cross-country study yet into the impact of the financial crisis and IMF programmes on low-income countries’ budgets reveals plans for significant cuts in spending in 2010. The research report, published in July by UK-based think-tank Development Finance International and NGO Oxfam International, studied 2009 results and 2010 budgets for 56 poor countries to see how they compared to the spending needed to reach the Millennium Development Goals (MDGs).

While praising the stimulus provided by a rise in deficits in two-thirds of the countries in 2009, it found that “only one-quarter have continued this stimulus in 2010. Countries with IMF programmes implemented more stimulus than others in 2009 but, conversely, are forecast to cut it back more sharply in 2010. This implies that, while the IMF protected social sector spending at the start of the crisis, it is now advising countries to reduce it.”

the de facto message to donors is very clear: no need to scale-up aid

Worringly it finds that “in 2010, deficits are set to halve, and not because of recovery or increased revenue. … Countries with IMF programmes are cutting faster than others: half of African countries (and 75 per cent of other LICs) with an IMF programme are cutting spending, even though most need to massively increase it if they are to reach the MDGs by the 2015 deadline.”

The report describes a ‘fiscal hole’ created by the financial crisis, but argues that there are ways to fill that hole. Based on indices of debt and macroeconomic variables, it finds that almost all examined countries have space to absorb and spend more aid, and that some of them could borrow more or raise more domestic revenue. It recommends that the IMF should “ensure that countries with IMF programmes (and others where it is providing policy advice) do not cut back spending in 2010 and 2011, and spend more to meet the MDGs and tackle climate change.”

To spend or not to spend?

The IMF background paper submitted to the UN’s mid September MDG summit focusses on stronger growth as a precondition for reducing poverty. The paper argues that “in order to withstand future volatility, [low-income] countries should start rebuilding their policy buffers as the recovery takes hold.” They define ‘policy buffers’ to “include low fiscal and current account deficits, higher international reserves, low debt and low inflation.” Essentially the IMF is arguing for no increase in government spending without increases in revenue, and claims that “rebuilding policy buffers and accelerating progress toward the MDGs are consistent objectives. … In strengthening their fiscal positions, countries should focus on improving domestic resource mobilisation, while protecting spending on the core MDG-related programmes.”

A July IMF working paper by Andy Berg and others, which does not represent official IMF policy, describes the model used to project the impact of the scale-up of aid according to the promises made by rich countries at the G8 meeting in Gleneagles in 2005. It adds nuance to IMF positions on spending and absorbing of aid (see Update 57). The paper argues that in some cases it does not make sense to spend all aid, but that in other cases accumulating aid surges as foreign reserves can be damaging. A key conclusion is that “a better approach … might be to redirect efforts to quickly increase the efficiency of public investment to enjoy the benefits of aid surges.”

Critics of the Fund were dissatisfied, especially given the focus on aid at the MDG summit. Rick Rowden, a researcher at India’s Jawaharlal Nehru University, argued that “the de facto message to donors is very clear: no need to scale-up aid”, “until countries can use their aid in the most efficient way.”

NGO Third World Network’s briefing before the MDG summit warned that “IMF loans to crisis-stricken countries across the world still, as in the past, carry fiscal and monetary conditions for fiscal austerity, monetary policy tightening, and a prioritisation on debt repayment and maintaining open capital accounts. This macro-stability focus predominantly serves creditors, investors, and markets, often at the expense of development-oriented macroeconomic policies that allow for consistent and scaled-up public spending, access to credit, and long-term investment in public services and production sectors across agriculture, industry, and services.”

The debate between the IMF and its critics also played out in the International Journal of Health Services throughout the first half of the year. One innovative suggestion that came out of the series of articles was for the IMF to undertake health impact assessments for all of its programmes. These would assess the effect of the borrowing countries’ economic policies on the health of the citizens of that country, with a special focus on the distributional consequences.