IFI governance


IMF strategy on social spending: New direction or band-aid?

12 April 2023 | Minutes


  • Alex Campbell, DC Director, ITUC


  • Rodrigo Cerda, Expenditure Policy Division Chief, IMF
  • Shahra Razavi, Director of the Social Protection Department, ILO
  • Alexander Kentikelenis, Bocconi University & author of new Oxfam report “IMF Social Spending Floors: A Fig Leaf for Austerity?”
  • Ahilan Kadirgamar, University of Jaffna, Sri Lanka

Alex Campbell: Social protection and decent work closely intertwined – workers age, get sick, lose their jobs seasonally or permanently. Particularly important now: Covid, climate crisis, ensuing shocks resulting in layoffs, illnesses, showing fragility of care and health infrastructure. “Recovery” has been extremely fraught, we don’t think austerity will get us out of this crisis, will only get us another lost decade.

In 2019 IMF adopted new social spending strategy, committing to only intervene on social protection when macro critical, ringfencing spending for most vulnerable, increase cooperation with international institutions like the ILO. This room has a lot of concerns on how the new strategy is going and how deep the change has really been.

IMF has followed up the strategy with 2 guidance notes, then came Covid, IMF encouraged governments to spend but keep receipts. Countries need to have systems in place to respond better to next crisis. Saw in the IEO report that social conditions in country programs not prioritised, still see at country level that IMF still advises to curb social spending. Why? Need to change staff culture.

Can you tell us about some cases that were successful and others where things didn’t work out?

Rodrigo Cerda: (showing presentation) FAD works on social protection, pensions, expenditure on health & education. Will talk about work of the Fund more broadly. We do surveillance, lending, capacity building. In 2018, operationalize inequality in country work. Since 2015, have had 45 pilots in surveillance. In Programs / lending, have conditionality. One is quantitative, could be on social spending floors. Sometimes we have others, structural conditions (structural benchmarks or prior actions), e.g., you might not have the registry required to provide social assistance. So first need prior action of the authorities to develop that. In addition, capacity development, on how to do distributional analysis. One example are fuel subsidies, when we provide advice we don’t just do so on the fiscal side, but also on the impact on the population / different groups of the reforms. Later may come back to those countries, provide tools to the authorities to make their own analysis on the best way to implement their policies. Trying to take a lot of steps on the distributional impact. Have established an Inequality Advisory Group, Fund-wide, to provide advice to all the other departments. Work with different development partners, one is the ILO from which we have learned a lot. We look at these topics much more from the macro critical side or the public finance side, we are not experts on education, health, here we need to learn from other partners. Engage with ILO on social protection, WHO on health, others on education. Allows us to provide advice on the public finance side.

Also key to talk about the SDGs, another topic we have been very involved in in the last years. One example is Angola 2023 country report, under selected issues. How much spending is needed for education (about 8 per cent of GDP by 2030) and health – advised to increase spending by 2.1, and increase health personnel by 4.6. Have a list of other Article IVs, and working papers resulting from capacity development in countries. Social spending not just social assistance, but also health, education.

Of course, this requires resources. How do we do that – medium term revenue strategy, to build the capacity in countries to be able to finance that spending. Taxation and fiscal revenue, 2016 working paper on tax capacity. Talking about that usually what we need it 13-15 per cent of GDP in tax capacity. In many countries, tax revenues are lower than that. To be able to finance all those required spending issues, need to build capacity for revenue raising. This is not our division, we are public expenditure, but have tax division advising on how to expand the fiscal space, raising tax progressivity. Not just taxation but also revenue administration. Once you increase taxes, need to be able to collect them.

For programs / lending, example Benin. Quantitative performance criteria and indicative targets 2021-2023. Two targets important: One, a tax revenue floor. Trying to expand capacity on the tax side, put some targets on floors. Floor on priority social expenditure.

Shahra Razavi: In 2019 IMF social spending strategy was a very welcome development. Bringing this closer to home, this interest the IMF was showing also paved the way for stronger cooperation with some of the international orgs that had a mandate on these social issues like the ILO. More recently, at 2021 International Labour Conference, constituents of the ILO asked the office to engage much more with IFIs in the work we do in development of social protection systems and floors. It was on that advice that the collaboration between ILO and IMF was strengthened, periodic knowledge exchange, analytical work, country teams paired up in pilot countries. Mutual learning experience over past 18 months, where ILO social protection specialists and IMF teams with fiscal expertise engaged in joint work e.g. in Iraq on pension reform, in Mozambique social assistance expansion, in Togo on classification of social protection expenditure, in Uzbekistan on fiscal space to mobilise resources. Experience has been quite positive, hope to build on.

But we need to have a broader focus in the discussion today, three key points:

  1. Macroeconomic context. More than 50 countries severe debt problems, 25 paid more than 25 per cent of government revenue to debt servicing last year, highest level since 2000 when HIPC was launched. Today, these financial pressures are against increasing social spending because countries have to service debt, at a time poverty and inequality are rising. IUN SDG financing report called strongly for the need to improve global development finance, in terms of scale and mission of the public development banks, channelling of SDRs, rewrite international tax norms, tax digital assets and businesses, course adjustment in redesign and ambition of the Common Framework. UN SG has been leading on this, without massive scale up of long term affordable financing many countries are at risk of falling into a vicious cycle of debt and fiscal austerity, which we know doesn’t work.
  2. Global employment will only grow 1 per cent in 2023, job losses from pandemic unlikely to be recovered until 2025. Cost of living crisis means poverty, including working poverty.
  3. Critical role of social protection, powerful tool at this. Moment to help households manage not only shocks but day to day lifecycle risk. This is where we need to locate the IMF’s role.

3 key points about this:

  1. Large majority of global population are working in the informal economy, don’t have access to social protection at all (let alone adequate). To achieve even a SP floor, developing countries would need to invest another 3.8 per cent of GDP on average, for LICs 16 per cent. Closing this gap is not feasible in the short term, agree with Rodrigo in medium term revenue mobilization strategy. However, progressively increasing fiscal space for a floor should be an important consideration.
  2. More spending on SP should not come at expense of spending on health, education, food. On health there has been significant progress over past years, but people in lowest incomes and in rural areas face challenges in meeting their health needs without financial issues. Not enough attention in adequacy, availability, quality of services – applies to health and education. Deploying and retaining well-trained and motivated health workers is absolutely key. Likewise very dangerous to remove food subsidies while developing assistance, there is a time lag. Very narrowly targeted safety nets is insufficient, food subsidies reach much wider, safety nets only reach the very poorest. In many developing countries even those just above the poverty line are very vulnerable.
  3. There are some bigger issues that need to be discussed around financing options. Social security contribution as a critical source of financing. Some organizations have talked about reducing or even abolishing them, on the pretext of incentives for employment generation and formalization. With WIEGO have commissioned important research looking at the validity of these arguments, showing very clearly that contributions have remained a very important source of financing, in 2019 accounted for 19 per cent of total revenue, about 7 per cent of GDP. No pattern between social contributions and informality. Really suggest you give some serious consideration to the arguments in this paper, need appropriate mix of taxes and social contributions.

Let’s remind us of the urgency of building social protection systems to prevent poverty, not just reduce it, and build resilient societies and economies. Financial conservatism has good rationale, but its demands must be interpreted in the context of the goals of development.

Alexander Kentikelenis: (Presenting his new Oxfam report) What we did in this report, we collected all evidence we could find from 17 IMF loans signed right after the strategy came into effect, so over 2020/2021, and tracked them through their reviews. 15 included social spending floors. Some countries have very narrow floors that focus on social assistance or some aspects of health and education, others really expansive, health, education, infrastructure, social protection. Looking at how countries rank, see Dem Rep of Congo, Gabon, Suriname, have very narrowly defined floors (1 per cent), Chad, Cameroon, Moldova very wide (30 per cent of current spending). So we aren’t talking about the same thing when we talk about floors.

Looked at do these floors become more or less ambitious over time? Mixed bag, some less, some more. Looking at implementation, social spending floors are met 2 out of 3 times (65 per cent implementation rate), vs. 85 per cent implementation rate on budget balance targets. Could be that in order to meet the budget balance, might fail their social spending floors. 5 countries didn’t meet them, Madagascar -42 per cent, Gambia and Niger have big margins of meeting them (Niger 226 per cent, Gambia 25 per cent), others more or less around the floors.

This doesn’t answer the tricky question: are these floors adequate? In all cases we could verify, the floors were below countries own spending ambitions in the budget or social strategies. Often also see wage limits attached to IMF programs, know they affect public services. Take-aways: High degree of inconsistency, because the floors are so variably defined. We find that they are inadequate, lagging behind country intentions, and their implementation rate is lower than that for other conditions.

We conclude that there is a better way – instead of floors, think about social spending goals, grounded in progressive revenue raising, countries’ development strategies, gender ambitions – still see a lag of introducing gender in programs, and universality is missing. Universal social protection should be a guiding principle, instead we see strong advocacy on targeted approaches. Transparency and disaggregation of data is important, if we as academics, civil society, governments, try to keep track of what happens on social spending, need disaggregated data we can compare across time. Focus should also be on reducing inequalities rather than just mitigating the harm done by austerity and crises. And protecting the wages of workers that help countries mitigate the effects of crises.

Ahilan Kadirgamar: Sri Lanka is going through its worst economic crisis since the Great Depression. Poverty has doubled to 25 per cent, one third of country now food insecure. Lost 2 per cent of our population during malaria crisis, left a strong legacy, have universal healthcare, university education, universal food subsidy system, led to high human development indicators by the 1970s. Started to change with structural adjustment, SL first country to liberalize economy, got rid of food subsidy and made it targeted cash transfer. Response to last crisis was to build a robust welfare system, what is really worrying is that currently we seem to be going radically in the other direction, targeted social protection measures, cash transfers, gets inflated away.

What SL has been going through over the last year, defaulted on external debt a year ago, last Annual Meetings called for IMF package, started immediately implementing a lot of the IMF recommendations of the previous staff report to make sure we get the program. Austerity measures, sudden depreciation of the rupee, 80 per cent cost increase of imported goods passed on to consumers, commercial lending interest rates went up to 13 per cent, petrol prices tripled, kerosene quadrupled. Sri Lanka is known for almost universal electricity, prices now almost tripled. GDP contracted by 7.8 per cent last year, this year likely 4.3 per cent. Economy has contracted by a fifth. All this in lead up to Board approval of IMF agreement, a lot of rhetoric there was this will be countered through social protection like targeted cash transfer that will balance this austerity. Now only a mere 0.6 per cent of GDP will be allocated for this.

What does this mean – Sri Lankas DSA in that report, over next 10 years SL will be allocating 4.5 per cent of GDP for foreign debt servicing, after the debt restructuring. That amounts to 30 per cent of our revenue every year from now on. The 0.6 per cent of GDP is a mere 4 per cent of the budget. Cash transfers for the elderly, disabled, ill. Doesn’t take into consideration what has happened to people’s daily lives – food inflation (90 per cent), fuel prices, people’s income has not risen, in the informal sector, income has come down 50 per cent. This is where the shift from universal social welfare to targeted measures is being pushed by the IMF package. Targeting is next to impossible, who is affected is seasonal, large share economy informal.

Agreement works towards interests of wealthier classes in SL, they will gain from wage depression, and external creditors. The big issue here is that the IMF is involved in 3 forms of restructuring: Debt, fiscal space and social welfare structure. All of this bring tremendous suffering. We have all seen the enormous protests last year, president chased away, now a new one who is not elected. If elections happen, political change is likely, crisis resolution prolonged.

Campbell: Mr. Cerda, what do you see as the disconnect here and any other reactions?

Cerda: This is a difficult moment for different countries. Would like to convey the message that when we talk about social spending, we don’t just talk about the floors, but also use other instruments like structural conditions to help the need of people. Also programs are in public documents, very transparent and I think it is good as it enables the discussion here today. Discussion about adequacy needs to be had of course, what we look in terms of program is we do not hurt the most vulnerable people, this is what the programs try to do in those moments.


Questions & answers:

Sarah Sadoon, HRW: Interesting that you mentioned looking at the social impact. To my knowledge only one recent program, Ecuador, included detailed analysis in their program. Can you speak a bit about your methodology and can this be included going forward? On the question of universal vs targeted, does the IMF have a position on that?

Cerda: The reports on the distributional analysis are on our website, all the methodology is there. Open for everyone to look at, try to make improvement if needed.

Audience: What you presented was from 2018, right? That was 5 years ago – why present it now?

Cerda: 2018 report is saying we have conducted a lot of pilots between 2015-2018 on surveillance side, how should we engage on inequality in surveillance.

Audience: With employment & social spending, are we looking at the quality. We did a study in Egypt, blue collar workers don’t really care about social security if they aren’t being paid well, because quality of the social services isn’t good enough. How do you address that?

Cerda: Have a lot of inflation still, looking to control this, one instrument is monetary policy, the other fiscal policy. Usually we just think about the spending side, but should also look at taxation. Have been looking at more progressive taxation, tax expenditure, have been building on that. Many countries didn’t have reporting on that.

Anita Thomas, NGO committee on FFD: To what extend does political will play into this?

Kentikelenis: It’s a necessary but not sufficient condition. How can we think about political will in an extremely constrained fiscal space, need to think about the two things in tandem. The more available space, the greater the likelihood to do more things.

Many countries did try to expand their social protection. IMF recently introduced RST, resilience is a multidimensional concept. If taxation is increased, what kind, for whom, how. Yes there are inefficiencies that many countries have, but part of this debate on targeted social protection is that these are policy apparatuses not easy to administer, it costs money as well, and de facto many people end up excluded. Know from social policy scholarship, a famous saying that “services for the poor are poor services”. This is what we should think differently about, rather than just protecting the most vulnerable, how to have an optimum level rather than a minimum level of social spending. The ILO, WHO are pushing the envelope in that direction.

Cerda: What I like to stress from our side, when we talk about the SDGs, try to have good services in education, health, infrastructure etc. Resources are need in quite a large amount, around 15-17 per cent of GDP, this is where we need to go but difficult. Since we have this complicated macro context, of course we need to think on how fiscal policy might help to greater equilibrium on macro side, are thinking about inflation and how that is hurting people. Of course we can discuss what we need by targeting subsidies, 10 per cent, 20 per cent, 60 per cent of the population etc. Has to be country specific. Have available some tools to reach people in need, digitization.

Don’t want you to think we just want to lower spending, we are trying to reach the SDGs as soon as possible, 2030 is very near. We have these goals, need to talk much more about medium revenue strategies, first need to get lower inflation.

Audience: Last year, UN poverty expert came out with report on importance of social protection, framing it in human rights perspective. This is absent in our discussion today. You talk about capacity building, but what about looking at it from a human rights framework. What would change design mean from a human rights perspective.

Cerda: Have done a lot of reports on SDGs.

Kadirgamar: It’s a question of who’s in power, cycles of changes. That’s why it’s important to have a social protection goal. So many countries are going through debt crisis, it’ll affect development financing, there will be trade-off. Worry is that social protection will be the default of getting cut. If we make it universal, it’s much harder to be inflated away or targeted down.

Razavi: Heard about inflation, this also means that at this moment we had a striking fall in real wages in many countries, by nearly 1 per cent in first half of 2022, the first time in the 21st century negative. Widening gap between productivity growth and wage growth. It’s not that the global economy is shrinking – profits are soaring, wages are stagnating or declining. In this context we also have debt crises through no fault of the countries, just because interest has gone up. In more than half of all social protection schemes there is no mechanism to adjust to inflation, so benefits are being eroded, even though ILO standards say you should have some indexation. People are very worried about the narrow targeting, even in the best of times – many countries don’t have data, many people just above the line and about to fall below, the rationing and targeting excludes a large amount of people. Human rights based approach wouldn’t even start with targeting, but universal, much better than untransparent proxy means testing – whom are you targeting in a context of 75 per cent being vulnerable. Thinking that we will solve this with digitization and better targeting is wishful thinking.