Global Policy Forum

The IMF’s Financial Crisis Loans: No Change in Conditionalities

Third World Network
March 11, 2009

The IMF had suffered a sharp decline in its lending business in recent years until the present global financial crisis led to a resurgence in lending. The Group of 20 (G20) has empowered the IMF by making it the key lending institution for crisis-affected countries in need of balance of payments support. As a result, the IMF's lending portfolio has seen a sudden boost, and the cumulative amount of its loans now stands at $47.9 billion.

Starting in September 2008, the IMF has to date negotiated Stand-by Arrangement (SBA) loans with nine countries: Georgia, Ukraine, Hungary, Iceland, Latvia, Pakistan, Serbia, Belarus and El Salvador. Other countries that may be negotiating loans in the near future are Turkey and Romania, while Sri Lanka has just recently requested a loan amount of $1.9 billion. The SBA financing ranges from $523 million for Serbia, the lowest amount, to a maximum of $16.4 billion for Ukraine and comprises some of the largest loans in disbursed in the IMF's history. In anticipation of a stream of new member countries that are predicted to request different types of IMF loans, the Fund is desperately attempting to double its lending resources to $500 billion by adding contingent facilities as well as approaching surplus countries to contribute funds.

The attached chart summarizes the IMF's policy advice and conditionalities in the areas of fiscal policies, monetary and exchange rate policies and financial sector policies directly from the official IMF loan documents with these nine countries. This preliminary assessment, which is a part of TWN's ongoing study of IMF financial crisis loans, reveals that the Fund's fiscal and monetary policies remain as tight and restrictive now as they have been in previous years. The IMF continues to design its loan programs on a framework of tightening fiscal and monetary policies, and establishing rigorous inflation targeting, in all nine countries.

The IMF's fiscal policy aims to reduce fiscal deficits by restraining public expenditure, in which the burden falls on public sector employees, the poor and the unemployed. Country examples of fiscal tightening are as follows:
• In Pakistan the Fund advises a reduction in the fiscal deficit from 7.4% of GDP to 4.2% through lowering public expenditure, gradually eliminating energy subsidies, raising electricity tariffs by 18% and eliminating tax exemptions.
• In Hungary, the IMF has targeted fiscal deficit reductions from 3.4% of GDP to 2.5% through a fiscal consolidation plan which involves freezing public sector wages, placing a cap on pension payments and postponing social benefits.
• Ukraine's fiscal deficit is targeted at a zero overall balance as a binding conditionality in its loan agreement. Public savings are to be generated through freezing public wages, pensions and other social transfers, postponing for a minimum of 2 years any increase in the minimum wage and cancelling tax cuts that were previously scheduled for FY 2009.

While IMF Managing Director Dominique Strauss-Kahn and other senior IMF officials have been urging countries that have fiscal and monetary space to implement fiscal stimulus programs in order to bolster aggregate demand and boost consumption, the advice stated in the IMF's loan conditions are a sharp contrast to their statements. For example, the IMF's SBA loan of $532 million to Serbia states that "..there is no scope now for countercyclical fiscal loosening. Anything less than a tight fiscal stance could also jeopardize the credibility of the program in the eyes of foreign investors and the Serbian public. Fiscal policy will in addition need to put a tight constraint on wage growth in government sectors and public enterprises."

IMF chief economist Olivier Blanchard said in a December 2008 interview, "What is needed is not only a fiscal stimulus now but a commitment by governments that they will follow whatever policies it takes to avoid a repeat of a Great Depression scenario." Furthermore, in February, Strauss-Kahn made a statement at the 44th Southeast Asian Central Banks Conference in Malaysia that there is now "a broad consensus on fiscal stimulus to restore growth." However, as demonstrated in the attached chart, all nine loan country recipients are being directed to implement the exact opposite policies of public expenditure reductions, fiscal consolidation plans, public sector wage cuts, and the phased elimination of subsidies. While the objectives of these IMF-supported loan policies are to boost foreign exchange reserves and address public debt burdens, there is no clear mention or analysis of the economic and social impacts that these contractionary policies will have in economies that are already contracting in economic recession.

While spending on social safety nets and social assistance schemes are being supported by the IMF in several loan recipient countries, it is important to note that in countries such as Pakistan the cumulative increase in social spending is 0.3% of GDP, whereas the reduction in public spending is on the order of 3.2% of GDP. This reduction in public spending includes an 18% rise in electricity tariffs, the phasing out of subsidies, spending cuts in the government budget, the elimination of tax exemptions in the General Sales Tax and the introduction of a new Value Added Tax law in the parliament.

The IMF's monetary policy is focused on reducing inflation through inflation targeting and monetary tightening. According to the IMF, lower inflation levels are to be achieved primarily through increasing the official interest rate. Country examples of monetary tightening are as follows:
• In Latvia, the IMF has advised raising the official interest rate by 600 basis points in 2008. According to the IMF, a reduction in domestic demand is the mechanism through which wage and price inflation are to be lowered.
• In Iceland, the interest rate was increased by 600 basis points to 18% in October 2008. The IMF stated that a tightened monetary policy in Iceland would help stabilize the krona.
• Pakistan's interest rate was advised by the Fund to increase by 200 basis points, to 15%, with the provision that any additional increases that may be necessary will also be implemented. The IMF also advised Pakistan to establish an "interest rate corridor" which could protect international reserves and enable domestic financing of the government to be achieved through market placements of government securities.

In recent months, pressures and exhortations have come from many G7 countries, as well as from the IMF's Managing Director, to increase the IMF's lending to crisis-affected countries and boost its resources. In our opinion, this would be the major mistake of the current crisis. The documentation of the IMF's current loan conditionalities and policy advice demonstrate that the traditionally contractionary nature of the IMF's fiscal and monetary policy framework has not changed. Additional resources to the IMF would give it the means by which to discipline crisis-hit countries the wrong way, worsening the crisis for them.

Third World Network's key recommendation is that in the current context of global recession and credit market turmoil, where the developed countries are implementing countercyclical macroeconomic policies, the IMF should not be advising developing and emerging market country borrowers to tighten their fiscal and monetary policies in a procyclical manner. In particular, given that the financial crisis today was in part caused directly by procyclical macroeconomic policies, the Fund should not be prescribing them as a solution now, just as it should not have prescribed contractionary policies during the Asian financial crisis of 1997-98.

Our other key recommendation is that the IMF should not be the primary and dominant vehicle to disburse financial assistance for crisis-affected countries. Other regional and national arrangements, such as the Chiang Mai Initiative in East Asia, should be strengthened and used. Additionally, mechanisms such as international debt arbitration should be established to address the increasing debt burdens of developing countries.

We call on you, as the UN Commission addressing the financial crisis and its impacts, to urge the G20, if possible, not to replenish IMF funds and not to legitimize a central role for the IMF as the primary crisis lender.

More Information on Social and Economic Policy
More General Analysis on the World Economic Crisis
More Information on the International Monetary Fund


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