IFI governance


Annual Meetings 2020 Wrap Up: Bank and Fund struggle to implement sustainable recovery as private sector dashes hopes of debt relief progress

21 October 2020

Managing Director Kristalina Georgieva participates in a panel discussion on post Covid-19 recovery and resilience during the 2020 Annual Meetings. Photo: IMF, Cory Hancock.

Seven months into the Covid-19 pandemic, the World Bank and IMF held their 2020 Annual Meetings virtually from 12-18 October. The meetings took place in the wake of the IMF World Economic Outlook’s (WEO) predictions of an uneven economic recovery, with a significantly deeper downturn expected for low- and middle-income countries, many of which are already teetering on the edge of debt default. While global leaders and policymakers met online to discuss “recovery and resilience,” the burning issue of the week was debt cancellation. Speaking during an event with Boston University’s Global Development Center, economist and Nobel laureate Joseph Stiglitz pointedly addressed the situation for countries with limited fiscal space who are in debt distress: “You can’t squeeze water out of a stone.” He emphasised that without debt restructuring and increased fiscal assistance to developing countries and emerging economies – and fast – there can be no sustainable recovery.

Despite this unavoidable truth, the meetings saw muted action on debt, reflected in the Group of Twenty’s (G20) communiqué released on 14 October. The G20 announced a six-month extension of the Debt Service Suspension Initiative (DSSI) and committed to publish a ‘Common Framework for Debt Treatments’ in November, which is expected to set out debt restructuring proposals on a country-by-country basis (see G20 communiqué analysis Annuals 2020). World Bank President David Malpass was surprisingly forthright in criticising the G20’s approach to debt, outlining its inherent creditor bias and consequent interest in avoiding debt reduction. In his statement to the G20, he also highlighted the “lack of participation by private creditors” in the DSSI. The G20 continued to try to coax private lenders into joining voluntarily, noting, “We are disappointed by the absence of progress of private creditors’ participation in the DSSI, and strongly encourage them to participate,” a statement which illustrates how little leverage governments have over private bondholders. The lack of private sector participation means crucial resources, including those made available by the DSSI, go to pay bondholders instead of supporting urgent health and social needs. Not only have private actors shown no interest in taking a haircut, they have also threatened to withhold capital from developing states if bondholders are forced to participate in the DSSI, as demonstrated by a September letter from the Institute of International Finance, the global association of the finance industry, to the G20 (see Preamble Annuals 2020). The threat meant countries in high debt distress have refused to participate in the DSSI on the grounds that it would restrict their access to capital markets (see At Issue August 2020).

Meanwhile, in her opening speech, IMF Managing Director Kristalina Georgieva said the WBG and IMF faced a, “new Bretton Woods moment,” harking back to the role the institutions played facing crises at their founding. But with private lenders disrupting debt suspension so forcefully, the state-led multilateral decision-making of the post-war era seems more remote than ever. The rising power of private creditors since the 2008 global financial crisis has meant that even the hands of the world’s wealthiest nations are tied when it comes to disciplining the financial markets that they have so readily touted as essential to achieving the Sustainable Development Goals (SDGs). Writing in US magazine Jacobin, Professor Daniela Gabor of the University of the West of England, Bristol, noted that such private sector “chutzpah is not self-grown,” adding, “It has been nurtured by a growing consensus in international development circles — from the UN to multilateral development banks, the official development aid offices of high-income countries, and the G20 — that private finance is a critical partner in the global efforts to achieve the UN’s Sustainable Development Goals.”

The rising power of private creditors since the 2008 global financial crisis has meant that even the hands of the world’s wealthiest nations are tied when it comes to disciplining the financial markets that they have so readily touted as essential to achieving the Sustainable Development Goals (SDGs).

For many, the situation presents further evidence that such decisions need to be taken outside of these fora. The statement by the Secretary-General of the United Nations Conference on Trade and Development (UNCTAD) to the G24 proposed, “a global sovereign debt authority, independent of either (institutional or private) creditor,” while a letter from over 500 organisations called for global leaders to commit to, “a fair, transparent, binding and multilateral framework for debt crisis resolution.”

Beware, instability ahead: IMF plays a dangerous game with austerity

In the wake of the pandemic in March, Georgieva highlighted IMF estimates that the financial need of emerging markets was $2.5 trillion dollars, echoing UNCTAD. Despite the record speed at which the IMF approved an unprecedented number of requests for financing from its members, the volume of lending has remained “relatively trivial” according to research published in September by academic journal World Development. The research concluded that as of July 2020, these institutions had only committed $89.56 billion in loans and $550 million in currency swaps, a total of $90.11 billion – just 12.6 per cent of their current lending capacity. The IMF’s response capacity has been constrained by the inability of its board to agree an allocation of Special Drawing Rights or consider gold sales (see Dispatch Annual Meetings 2020). The US, which has veto power on the board, has consistently blocked this proposal, with US Secretary of the Treasury Steven Mnuchin rejecting both options in his statement to the International Monetary and Financial Committee and Development Committee (see IMFC communiqué analysis Annuals 2020). Similarly, new data from the US-based Center for Global Development found that the World Bank’s emergency financing by the International Development Association (IDA), its low-income country arm, and the International Bank for Reconstruction and Development, its middle-income country arm, will total just $79 billion by June 2021, significantly lower than its $104 billion target. The paper concluded that the Bank’s response was “too small and too slow.” Perhaps in an attempt to boost this figure, Malpass announced that he planned to ask the institution’s shareholders to contribute an additional $25 billion to IDA. This request was initially rebuffed by the US, the Bank’s largest shareholder, with Mnuchin calling on the World Bank “not to burden shareholders with premature calls for new financing.” Reflecting the dominant role played by creditors in the G20 and both institutions, financing is falling far short of what is needed. Speaking at the Boston University event, Stiglitz warned that without a greater fiscal stimulus packages and debt restructuring, “there will be austerity; their [developing countries’] incomes will be going down, their tax revenues will be going down.”

True to form, the IMF has prescribed stringent austerity measures in staff reports for countries linked to its emergency finance released since the onset of the pandemic (see Observer Summer 2020). Data published by Belgium-based civil society organisation Eurodad in October found that 72 countries that received IMF Covid-19 financing are projected to begin fiscal consolidation as early as 2021, worth 2 per cent of GDP on average. Meanwhile, new research by Oxfam found that IMF staff backed fiscal consolidation measures, including wage bill restraints and other spending cuts, in 84 per cent of IMF loans extended during the Covid-19 pandemic. Though this research presents clear evidence of what’s to come, the Fund’s public messaging during the meetings was inconsistent. While Georgieva emphasised these reforms were mostly about progressive taxation in her town hall meeting with civil society, other officials were more forthcoming on the need for fiscal consolidation measures in the absence of private creditor participation in debt relief efforts or a new SDR allocation. The case for further for fiscal consolidation measures for developing countries, despite its policy advice at country level, was notably absent from the IMF’s flagship report, the Fiscal Monitor, perhaps in an attempt to avoid further public criticism on the issue (see Observer Autumn 2020). It did concede that “almost half of low-income developing countries are projected to cut total spending, and about 60 percent are expected to cut capital spending in 2020 from 2019 levels.” The report emphasised the need for spending and public investment in infrastructure for advanced economies, particularly for physical infrastructure maintenance.  The report was silent on investment in the care sector, other than health, which UK-based civil society organisation (CSO) the Women’s Budget Group, recently highlighted would produce 2.7 times as many jobs in the economy overall as an equivalent investment in construction in the UK context. By the end of the week, even the Financial Times had noticed the inconsistencies in the Fund’s messaging on austerity, remarking, “Even within the IMF, there are tensions. While its managing director urges countries to dare to do new things, officials still insist on austerity for countries that are forced to borrow from the fund.”

Stiglitz clearly cautioned that if countries are engaged in austerity, “there is not going to be a strong recovery, their…depression will extend for years,” while Richard Kozul-Wright from UNCTAD and Brazilian economist Nelson Barbosa warned of the “damaging consequences” of this approach, which was also taken by the Fund after the 2008 global financial crisis (see Update 71). Writing in UK-based political website openDemocracy, Kozul-Wright and Barbosa stressed that, “Recovering better this time will need to follow a different path, with an emphasis on jobs, wages and public investment.” Others warned that the lack of an inclusive recovery will fuel instability, as with the Arab Spring in the wake of the global financial crisis. Sir Mark Lowcock, the UN under-secretary for humanitarian affairs, told UK newspaper The Guardian in September that wealthy nations’ refusal to scale up financial support to developing countries will, “fuel grievances, and in their wake conflict, instability and refugee flows, all giving succour to extremist groups and terrorists. The consequences will reach far and last long.” Already, tension is building. On 5 October, Costa Rica’s president Carlos Alvarado announced the country’s withdrawal of a contentious austerity proposal that was part of the government’s efforts to secure an IMF loan, following weeks of protests.

In better news, the Fiscal Monitor did come out strongly for increasing progressive taxation, which it noted includes increasing tax rates on higher bracket incomes, capital income, higher end property, or wealth, as demanded by global CSO network the Fight Inequality Alliance. It also called for “reforms to modernize business taxation, including multilateral cooperation on the design of international corporate taxation.” Unfortunately, the latest blueprints for the G20 and Organisation for Economic Cooperation and Development’s Inclusive Framework on Base Erosion and Profit Shifting, which was supposed to be the world’s leading initiative to tackle global tax evasion and avoidance, have been strongly criticised as insufficient and a major failure of multilateralism led by rich countries by tax campaigners (see G20 communiqué Annuals 2020).

Despite rhetoric on the sustainable recovery, Bank and Fund’s neoliberal orthodoxy continues to constrain action on climate change

Achieving a ‘sustainable and resilient recovery’ from the Covid-19 pandemic was a key theme of the Annual Meetings official schedule, with Malpass mentioning the need for investing in low-carbon energy sources in his pre-Annual Meetings speech. It was the WBG president’s first nod to climate change mitigation in public statements since his appointment, following his nomination in March 2019 by the Trump Administration, which has undermined global climate action by withdrawing from the Paris Agreement (see Observer Spring 2019). The IMF also consistently highlighted the need to tackle the climate crisis during the Meetings, with Georgieva highlighting the need to tackle climate change in her plenary speech, and the Fund outlining how countries should pursue mitigation policies in Chapter 3 of the World Economic Outlook, published on the eve of the Annual Meetings. However, despite encouraging signalling by both leaders, mainstreaming support for a green recovery into the institutions’ own policies remains a largely incomplete endeavour.

At a World Bank high-level event, A Sustainable Recovery for People and Planet, on 14 October, upbeat presentations sought to highlight the Bank’s climate-related investments – omitting entirely the fact that the World Bank has invested over $12 billion in fossil fuels since the Paris Agreement was signed, according to new research from Germany-based CSO Urgewald. Malpass also bemoaned the impact of environmental degradation at the event, noting the link between exploitation of the environment and zoonotic spill-over of diseases, including Covid-19 – apparently unaware of the Bank’s own poor record in this area (see Observer Summer 2019). As noted in Bruce Rich’s classic critique of the Bank, Foreclosing the Future, a 2011 report from the Bank’s Independent Evaluation Group produced damning evidence on the impact of Bank projects on tiger habitats across Asia. An op-ed from US-based CSO Bank Information Center published in development news site Devex in 2019, meanwhile, noted, “Current projects in Indonesia, Democratic Republic of the Congo, Liberia, and Brazil seem poised to drive deforestation.”

Meanwhile, the IMF’s role in providing de facto support for fossil fuel expansion was highlighted in a new report by four CSOs, including Netherlands-based Recourse and India-based Centre for Financial Accountability, which looked at IMF surveillance in five countries, including South Africa, India, Mozambique, Indonesia and the Philippines. The report showed the Fund, “failed to recognize the scale of climate change-related macroeconomic risks, especially related to the energy transition,” with IMF surveillance supporting, “tax incentives for new coal and fossil fuel infrastructure, and… [encouraging] government spending on mega fossil fuel projects in Indonesia, India, and Mozambique.” It is also unclear how the WEO’s policy advice on climate mitigation, which recommended a Keynesian investment in green infrastructure accompanied by carbon taxes and other green policies, is immediately relevant to the large swath of emerging market developing countries who are experiencing severe liquidity issues and debt distress, with a fresh wave of austerity, including as part of IMF lending conditions, on the horizon.

Six ministers from the Bank and Fund’s European shareholders, in a nod to the fact that Bretton Woods Institutions’ work on climate has not yet displaced their dedication to business as usual practices, penned an open letter during Annual Meetings, calling for World Bank and IMF to spearhead a green recovery. The ministers noted, “We need to urgently phase out investments in coal, oil and gas,” adding, “We need to make sure we do not lose sight of green and inclusive reforms because of limited fiscal space and a looming debt crisis.”

Fool’s gold: World Bank champions private sector in Covid-19 recovery

Despite Malpass’s frank comments on private lenders’ refusal to participate in the DSSI, the false narrative of the World Bank’s Maximizing Finance for Development (MFD) approach, which posits the private sector as the miracle cure for the SDG ‘financing gap’ (see Observer Summer 2017) was as strong as ever. During the Annual Meetings, it became clear that the WBG had chosen to not only take this approach in its emergency financing response during the pandemic (see Observer Spring 2020), but also into the recovery. Research published in October by Eurodad and UK-based School of Oriental and African Studies (SOAS) found that over half of the WBG’s initial emergency funding to tackle the Covid-19 crisis had gone to the private sector instead of being invested directly in better public services in developing countries. Speaking during the World Bank Civil Society Townhall, Stephanie von Friedeburg, Interim Managing Director and Executive Vice President of the International Finance Corporation (IFC), the Bank’s private sector arm, remarked that MFD is “potentially more important now than ever,” adding, “it is the right approach so we will continue to push.” Following Malpass’s comments on structural reforms at the Spring Meetings, von Friedeburg highlighted the use of Development Policy Financing, the Bank’s budget support lending instrument, as a means to “increase the role of the private sector” and to “pull private capital back to emerging markets.” The dangers of such a reliance on private investment, coupled with the continued reluctance of the IMF to support capital controls, have been starkly demonstrated by the unprecedented capital flight from developing economies since March, which has exacerbated liquidity issues and deepened debt distress as countries attempt to contain the pandemic (see Dispatch Spring Meetings 2020). Von Friedeburg’s remarks represent a clear contrast to much of the rhetoric around investing in public services espoused by the Bank during the meetings.

BWIs self-referential culture remains alive and well

Throughout the week, the official events had strangely cheerful quality with the IMF and WBG’s PR machines in full spin – a surreal tone given the gravity of the global situation. “We’re live from the World Bank atrium in Washington DC,” beamed one moderator, adding, “You, the audience have more opportunity than ever to participate,” as if introducing a televised talent competition rather than a forum where critical decisions about recovery from the catastrophic economic crisis were taken. Despite encouragement to “use your voice,” in reductive online surveys, many of the virtual events were ‘invite-only’, while others were restricted to pre-selected softball questions with little discussion between panelists. This was a far cry from the discussions over the preceding two weeks at the virtual Civil Society Policy Forum, which provided space for civil society organisations (CSOs) to bring critical perspectives to World Bank and the IMF management and executive boards (see Background Tracking the Trillions: Emergency funds, corruption and making the Covid-19 recovery work for all; COVID-19 and Debt: Going Beyond Debt Suspension Towards a Systemic Response to Debt Crises; World Bank Group’s ‘Maximizing Finance for Development’ in times of COVID-19; Building a feminist recovery for all: gender transformative policies are more urgent than ever; Fiscal space for universal health and social protection post Covid-19 pandemic: How to prevent austerity; Climate change and the Covid-19 recovery – the role of the IMF in building back better). Collectively, this year’s meetings epitomised the Bank and Fund’s much-critiqued self-referential and group-think culture, memorably condemned in the 2006 Deaton Report and IEO’s 2011 evaluation of the Fund’s performance in the 2008 global financial crisis, which frequently disregards divergent perspectives and meaningful critical engagement (see Inside the Institutions What are the main criticisms of the IMF and World Bank?).