Democracy: “an enemy to the IMF”?

8 April 2013

The legitimacy of IMF engagement with Middle East and North African nations and eurozone crisis countries continues to be heavily criticised (see Update 83, 82, 80).

In the Middle East and North Africa region, the transitional nature of governments in countries that have undergone dramatic political changes since the onset of the so-called ‘Arab spring’ has called into question their mandate to agree and implement wide-ranging reforms sanctioned or required by the Fund.

The IMF stands accused of excessive haste in its willingness to lend to new administrations. Following January reports that the IMF had opened negotiations with the Tunisian government over the terms of a potential $1.78 billion loan agreement, IMF spokesman William Murray confirmed in March that the Fund continues to negotiate “at a technical level”. Reuters reported in March that government reforms, including tax increases and levies on public salaries, though not explicitly linked to an IMF loan agreement, have led to a “storm of public criticism” which “may affect” government efforts to secure the loan.

"a pistol to the head"

The current Tunisian government is interim and set to be dissolved later this year for planned elections. Speaking to Al Jazeera in March, Mabrouka Mbarek of Tunisian opposition party Congress for the Republic noted that “it seems that democracy is an enemy to the IMF”, adding that while there are “almost daily” strikes and protests, “we need to have economic reforms that work for the people”.

In Egypt, despite a $4.9 billion loan agreement having been rejected twice due to popular protest, the IMF reportedly floated the possibility of an interim loan under the Rapid Financing Instrument while negotiations continued. Speaking to financial news agency Bloomberg, analysts at Capital Economics, a London-based economic advisory firm, explained that it is “unlikely that the IMF would leave the Egyptian government high and dry” even if a full program can’t be agreed immediately, pointing out that the Fund’s possible offer of an Rapid Financing Arrangement (RFI) until after Egypt’s elections reflects “the country’s political importance.” The RFI was intended to provide “rapid assistance” to countries “facing urgent balance of payments needs”, and was created in the wake of the 2009 global financial crisis as a part of a package of new instruments designed to deal with member countries’ “diverse needs”.

Concerns are mounting that an agreement with the IMF may be rushed through without a sufficient mandate. Mohammed Mossallem, of NGO the Egyptian Initiative for Personal Rights, said “officials have insisted that the IMF loan has no conditionalities and does not infringe upon Egypt’s financial autonomy. However, the extent of the control and leverage exercised by the Fund in Egypt’s case became evident when the government refused to disclose its reform plan until the IMF had reviewed and approved it.” Moussallem continued “the government program is a long term macroeconomic stabilisation plan, meaning the Fund will continue to play a significant role in managing Egypt’s social and economic policies in the long run.”

The Financial Times reported in February that the Egyptian government was keen to use the subsequently delayed April elections “to form a government mandated to implement an IMF programme”, so that Egypt’s population “would then be persuaded to swallow the bitter pill of reform”. Mossallem recalled that “in the past two years, citizens in Egypt have been completely excluded from the decision-making process around these issues, given the absence of parliament to discuss and approve the IMF deal.”

Egyptian newspaper Al Masry Al Youm quoted in March an Egyptian finance ministry official as claiming that the IMF remained ”not satisfied” with Egypt’s amended social and economic reform programme, despite the government adopting a “more severe version of the reforms last year” which had been rejected due to the scale of the “public outcry.”

IMF still adrift in Europe

Having published in March the first ever financial sector assessment programme for the European region, focusing on the risks to economic stability posed by the private financial sector’s continuing need for reform, the IMF now increasingly interacts with eurozone nations as a bloc, rather than as separate and sovereign nations.

The failure of reforms sanctioned by the IMF via the Troika, the partnership of the European Central Bank (ECB) and European Commission with the Fund to provide loans to eurozone crisis countries, to achieve growth targets and economic recovery has been criticised for undermining the legitimacy of the reform agreements themselves and even threatening the euro’s future. Writing in February, Paul De Grauwe of the London School of Economics and Yuemei Ji of the University of Leuven, pointed out that the popular mistrust of these reforms is due to the now “obvious” fact that “austerity produces unnecessary suffering”, such that “millions may seek liberation from ‘euro shackles’.”

De Grauwe and Ji argued that policy makers have been weak in the face of financial markets pressure, which had “provided the wrong signals” to policy makers and authorities, contributing to nations being “forced … into intense austerity that produced great suffering”. An official of credit rating agency Standard & Poors warned news agency Reuters in February of the “socially explosive” consequences of high unemployment in crisis nations, arguing that the ability of these nations to implement reforms is in question due to lack of popular support. Daniela Schwarzer of the German Institute for International and Security Affairs wrote in March that the experience of the euro crisis has led to the democratic legitimacy of reforms being “undermined”, because for countries currently undergoing a Troika programme, their experience is “that the population’s say over economic decisions is literally null.”

The IMF is in a delicate position because of its different roles in Europe and what each entails, be it lending, providing advice or conducting economic surveillance. A day after an ECB decision to hold eurozone interest rates at 0.75 per cent, IMF managing director Christine Lagarde countered that “monetary policy should remain accommodative … there is still limited room for the ECB to cut rates further”. She explicitly referenced Germany when noting that “countries that can afford to” raise inflation rates in the eurozone should do so.

The IMF’s euro area financial sector assessment explicitly took sides in a debate that is not yet settled in the eurozone when it argued the need to “sever” the ties between struggling banks and public obligations to bail out private institutions such as occurred in Ireland and Cyprus, and which Spain still hopes to avoid. The IMF also called for a single banking supervisor, and pushed the EU to go further than current agreements between EU states envisage, for example by calling for a powerful authority to shut troubled banks and set the rules by which European money would be lent in future, often referred to as a resolution authority.

In Greece, the role of the IMF in legitimising structural adjustment was analysed by CJ Polychroniou, of the US-based Levy Institute, in a February paper. It pointed out that in the early phase of Greece’s crisis the government sought to approach the IMF directly, as “Greece needed to be ‘rescued’, and the Europeans needed not only the IMF’s expertise but also to add … legitimacy to the austerity experiment.” Despite the relative stability achieved by the December 2012 Troika agreement, a February strike of unions representing over 2.5 million members sought to repudiate the terms of the Greek loan. In the lead up to the strike, the Greek government cancelled a commitment to make almost 2,000 public sector workers redundant, despite it being a condition of the loan. A Greek polling company told Reuters that if expectations of a long-promised economic turnaround “are not met by summer, then … [workers] will respond with more protests.”

The March Troika agreement with Cyprus has been castigated by commentators such as Wolfgang Munchau in the Financial Times, who argued that quite apart from running the risk of provoking a bank run, the “long-term political damage of this agreement is going to be huge.” It has also provoked disbelief due to the apparently high-handed manner in which a deal, which was subsequently unanimously rejected by the Cypriot parliament, was imposed upon the newly-elected government. Maltese finance minister Edward Scicluna, present at  the meeting of eurozone countries and Troika representatives where the deal was agreed, wrote that it “was agreed by to by the Cypriot government representative, with a pistol to the head”, also observing that “there is nothing more undignified than the sight of a bankrupt person begging for assistance.” George Sklavos, a senior Cypriot finance ministry official also present at the meeting told the Guardian that it was “clear blackmail. We were told either you accept this or on Tuesday your banks will not open”, adding “It was a fait accompli. They had made their decision before the meeting had even begun.”

The Troika will provide Cyprus with €10 billion ($12.8 billion) of loans, of which the IMF will provide a three-year, €1 billion loan. The deal requires the winding-down or downsizing of Cyprus’s two dominant, and now bankrupt, banks in addition to drastic fiscal consolidation, comprising according to the Financial Times of “spending cuts” and “deep structural reforms”, which the Fund expects will reduce GDP by 4.5 per cent. Petros Kosmas, of the Cyprus University of Technology, remarked that “Cypriots have been kept in the dark while their fate was determined in Brussels by institutions who took no interest in their needs or rights. Democratic pressure rejected the first, untenable Troika agreement, now people have to exercise their rights to resist any more damage being illegitimately imposed upon them” (see Update 85).

In Ireland anger remains over the IMF-sanctioned February agreement on the resolution of collapsed Anglo Irish bank. The placing of the debts generated by the collapse of the bank into promissory notes underpinned by sovereign bonds, thereby making public taxpayers ultimately liable, led the Anglo: Not our debt campaign to describe the plans as “devious and undemocratic”, arguing that the reform was “railroading through legislation.” After approval, the government said it would have been “pointless” to have sought a better deal with lenders on behalf of Irish citizens, as campaigners had demanded. University of Athens economist Yanis Varoufakis wrote that this meant the “Irish taxpayer will continue to be burdened with huge, unsustainable long term debts taken out by bankers who are now defunct and should never have been backed by the Irish state.”

In March, Lagarde congratulated Ireland, saying it is “setting standards” in its reform commitments and should be recognised for its “huge” efforts. Lagarde lauded the “sense of ownership” of Irish reforms, saying “we could see … that there was strong political will to implement the needed policies.” Writing in February, Nessa Ní Chasaide, of the Debt and Development Coalition Ireland, questioned the degree of ownership that Ireland enjoys over its economic destiny, arguing that the “power dynamic within Europe now sadly mirrors the historic global power dynamics between countries of the global south and northern-dominated lending institutions.”