IFI governance


Annual Meetings 2020 Preamble: IMF and World Bank frontload austerity and privatisation in Covid-19 recovery, while the world calls for more inclusive multilateralism

12 October 2020

IMF Managing Director Kristalina Georgieva during the virtual 2020 Annual Meetings on October 9, 2020. Photo: Cory Hancock

As the number of global deaths from the Covid-19 pandemic surpasses 1 million, the IMF and World Bank begin their Annual Meetings promising to deliver on green and just recoveries from the pandemic and its devastating consequences (see Observer Summer 2020, Spring 2020). Yet, with the Civil Society Policy Forum taking place this year before the Annual Meetings, the contrast between civil society proposals for feminist, green recoveries that avoid another decade of austerity and the solutions offered by the World Bank and IMF has never been more stark.

While debates about the stability and durability of the current multilateral system predate the current crises triggered by Covid-19 (see Bretton Woods at 75), the pandemic has made the international system’s failings abundantly clear, and the need for reform more urgent.  In September, UN Secretary General António Guterres stressed to Security Council members that, “the pandemic has illustrated beyond dispute the gaps in our multilateral system,” adding, “we need multilateral institutions that are fair, with better representation of the developing world, so that all have a proportional voice at the global table.” The Secretary General’s warnings about the failure of the multilateral system to equitably respond to the crises triggered by the Covid-19 pandemic echoed concerns outlined in the UN Conference on Trade and Development’s (UNCTAD) 2020 Trade and Development Report (TDR), published in September, that, “Multilateralism has struggled to adapt and reforms, while regularly promised, have been resisted by the strongest players.” The Annual Meetings will take place against this backdrop, as the Bank and Fund – under the strong influence of the G20 – continue to play a fundamental role, bringing to the fore the interplay between their structural shortcomings and those of the multilateral system more generally.

The stark contrast in response capacity between the industrialised G20 countries and the rest of the world remains a matter of urgent concern. G20 countries have been able to roll out stimulus packages amounting to about $12.1 trillion or 3.5 per cent of global GDP to combat the pandemic. Despite much talk of ‘building back better’, analysis by Vivid Economics found, “a net negative environmental impact in 16 of the G20 countries” as a result of stimulus efforts. Meanwhile, no such flexibility exists for developing states, which continue to be significantly constrained by their subordinate place in the world economy (see Observer Autumn 2020) and deepening debt burdens. In the words of the IMF, “for advanced economies, it is whatever it takes. Poorer nations strive for whatever is possible.” The implications of continued failure are clear from the World Bank’s Poverty and Shared Prosperity report launched prior to the Annual Meetings, which projected that  up to 150 million additional people will live in extreme poverty by 2021 as a result of the pandemic, climate change and conflict.

the current [multilateral] system is unable to deliver a decolonial, feminist and just transition for people and planet.

Debt cancellation essential for just recovery

Debt relief and the nature of the support provided by the Bank and Fund to states struggling to respond to the effects of the pandemic will be central to the virtual discussions at the Annual Meetings. The G7 announced in September support for an extension to the G20’s Debt Service Suspension Initiative (DSSI), which has enabled 43 of 73 eligible countries to defer $5 billion in official bilateral debt payments until December 2020. This extension is expected to be formally agreed at the G20 finance ministers meeting on 14 October and to last another six months, rather than through the end of 2021 as proposed by the IMF. The initiative was initially projected to postpone $12 billion in immediate debt servicing payments for developing countries, but some states have been reluctant to participate, given the implications this could have for their standing with credit ratings agencies and institutional investors (see At Issue August 2020).

Given the centrality of the debt issue to Covid-19 recovery strategies and the fact that the DSSI is considered insufficient by many, including World Bank President David Malpass, to resolve the debt crisis in low-income countries while excluding-middle income countries, the outcome of the G20 meeting will be particularly closely watched. In a recent blog based on a report, IMF Managing Director Kristalina Georgieva highlighted the need for urgent reform of the international debt architecture. The World Bank president’s remarks prior to the Annual Meetings stressed the need to ensure participation of the private sector in debt suspensions and eventual restructures and the challenges posed by the current ad hoc debt system, whereby countries must negotiate individually with creditors governed by UK and US jurisdictions that privilege private creditors. Positive statements by the leadership notwithstanding, it remains telling that neither institution has yet supported the demands for wide-ranging debt cancellation, including by the Bank and Fund, or the establishment of an independent international debt workout mechanism under the auspices of the UN, which would significantly diminish their influence in international debt negotiations.

The inability of the IMF board to agree an allocation of Special Drawing Rights or consider gold sales to enable an expansion of fiscal space via debt relief and enhance the emergency response capacity of countries affected by the pandemic, particularly middle income countries that are falling between the response cracks, raises questions about the degree to which the institution is fit to maintain its place within the multilateral order. Despite its $1 trillion lending capacity, the Fund is currently only making about a quarter of that available to its member countries. This doesn’t come close to matching countries’ needs, with UNCTAD noting, “developing countries [are] facing substantial redemption schedules for their public external debt in 2020-21, amounting to between $2 trillion and $2.3 trillion for high-income developing countries and to between $600 billion and $1 trillion for middle- and low-income developing countries.” The World Bank’s unwillingness to reconsider the expansion of grants to middle-income countries, which are currently only provided loans, similarly calls into question its role as the world’s supposed ‘leading development institution’, as does its continued unwillingness to contemplate debt cancellation (see At Issue Summer 2020).

Hopes for meaningful reforms now seem misplaced

A July statement by the Group of 77 (G77, a coalition of 134 developing countries) painted a disturbing picture of the situation of most developing countries. Considering the nature of the support provided, the G77 underlined that support to developing countries, “should not be tied to any conditionality and should not impose undertaking some sets of economic policy reforms, such as austerity measures, particularly in the context of the COVID-19 Pandemic.” The Group’s call was supported by UNCTAD analysis which cautioned that, “The tendency is not only to underestimate the costs of contractionary policies but also the potential benefits from expansionary fiscal policy, in the name of preserving a market-friendly notion of financial credibility.” UNCTAD added that, “Borrowing conditions attached to IMF programmes tend to mimic this contractionary bias.”

Yet, despite the mounting evidence of the consequences of the reliance on ‘market-based’ systems and fiscal consolidation, including in terms of the capacity of health systems to respond to the pandemic, the Bank and Fund have shown little willingness to reconsider their approaches beyond the initial emergency support provided. This is evident from recent Fund programmes, which continue to focus on rigid fiscal consolidation (see Observer Autumn 2020), and have become the subject of an open letter signed by over 500 organisations and academics ahead of the Annual Meetings calling on the Fund to permanently end its austerity prescriptions. Analysis of IMF reports on financing agreements by Brussels-based civil society network Eurodad found that between 2021 and 2023, 80 countries will be required to implement austerity measures equivalent to an average of 3.8 per cent of GDP. This represents almost five times the amount of resources allocated to Covid-19 financial packages in 2020.

In turn, the Bank is using the argument of decreased fiscal space to push its private-sector first Maximizing Finance for Development (MFD) approach (see Dispatch Spring 2020, Observer Summer 2017). Existing concerns about the regulatory race to the bottom caused by the struggle to attract private investment, including foreign direct investment, will only be heightened in light of the flight of capital from developing countries since March. These dynamics bring into sharp relief the question of the skewed power structures between the private sector and states facing critical constraints and the implications of MFD’s emphasis on de-risking private sector investment. In a thinly veiled threat, the Institute of International Finance (IIF), the global association of the finance industry, cautioned the G20 in September that, “any coercive or top-down approach [to debt suspension] would put debtors at risk of default and undermine the functioning of private financial markets, jeopardising market access and capital flows well beyond those of DSSI-eligible countries.” The threat by the IIF to withhold capital from developing states is a strikingly transparent example of the power exercised by the World Bank’s principal ‘partner in development’. The threat of private sector lawsuits at international arbitration bodies such as the International Centre for Settlement of Investment Disputes (ICSID, the World Bank arm for investor-state dispute arbitration) against states for actions taken in response to health and economic crisis is a further example of the risks inherent in conceptualising the private sector as an ally in the just recovery (see Observer Summer 2020).

Despite the Bank’s stated focus on a “resilient and inclusive recovery” and the release of its Covid-19 response approach paper, questions about the World Bank’s ability to effectively adapt its response to the current context have surfaced when considering the composition of the bulk of the $160 billion that it will make available during the next 15 months in response to the pandemic. Given the Bank’s focus on rapid disbursement, significant doubts have been raised about the extent to which World Bank programmes have been adequately adapted to reflect the pandemic, with fears that pre-existing projects and programmes already in the World Bank’s pipeline have merely been frontloaded (see Dispatch Spring 2020). As highlighted by Ireland-based CSO Front Line Defenders in April, concerns about project selection are exacerbated by apprehension about the safety of human rights and environmental activists, as states use Covid-19 restrictions to further close civil society space and reinforce authoritarianism. The way the Bank handles the changes in leadership at the International Financial Corporation, the Bank’s private sector arm, and its independent compliance mechanism, the CAO, and the implementation of the independent review of accountability at both institutions will send an important message about the Bank’s commitment to ensuring accountability (see Observer Autumn 2020).

Will other multilateral spaces offer more inclusive solutions?

As the World Bank and IMF continue to struggle to respond to the crises triggered by the pandemic, heads of states met virtually in September at the margins of the UN’s 75th anniversary celebration for discussions under the “Financing for Development in the Era of COVID-19 and Beyond” framework. Ahead of the meeting, over 350 CSOs and networks signed an open letter emphasising the urgent need for “systemic solutions to the broken global economic architecture,” stressing that the current system is unable to deliver a “decolonial, feminist and just transition for people and planet.” The letter highlighted the need for “the democratization of global economic governance, recognizing the right of every country to be at the decision-making table, and not only those concentrating power or resources. A new global governance should promote equality and common but differentiated responsibilities on global commons.” The G77 statement in September echoed the sentiments of the open letter noting that the UN remains  “a platform where every member has a seat at the table and a voice in the search for solutions to the many problems we face.”

Referring to the “menu of options” developed by six groups of governments following an initial high-level dialogue in May, and made available prior to the heads of states meeting, the open letter called on states to implement key recommendations, including: Extensive debt cancellations and the establishment of a Sovereign Debt Workout Mechanism at the UN; new allocation of SDRs; establishment of a UN tax convention to address tax havens, tax avoidance and illicit financial flows; and mandate the organization of an, “International Economic Reconstruction and Systemic Reform Summit under the auspices of the UN,” to move towards a new global economic architecture that works for the people and planet.

UN Secretary-General Guterres remarked in a September event that, “Solidarity is self-interest.” The outcomes of the World Bank and IMF Annual Meetings will demonstrate whether key shareholders will have reached the same conclusion and have begun to reshape the institutions and their position within the wider multilateral system, or whether they have continued to undermine the already compromised legitimacy of the multilateral system.