It’s difficult to understand why our new government leaders are celebrating getting on to an International Monetary Fund (IMF) programme. It reminds me of the PF government’s celebrations over getting the Euro bonds. Can one really celebrate getting kaloba! Is that something to really celebrate?
In life it is very important to be clear about things or else you’ll be trying to decorate your tomorrows with other people’s yesterdays. Those in the dark are in no position to light the way for others.
The truth is that when a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that the IMF believes led it to seek financial aid. These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF. Conditionality covers the design of IMF-supported programmes —that is, macroeconomic and structural policies—and the specific tools used to monitor progress toward goals outlined for cooperation with the IMF.
The IMF believes that conditionality helps to stabilise balance-of-payments problems without resorting to measures that are harmful to national or international prosperity. At the same time, the measures are meant to safeguard IMF resources by ensuring that the country’s balance of payments will be strong enough to permit it to repay the loan.
Most IMF financing is paid out in installments and linked to demonstrable policy actions. This is intended to ensure progress in programme implementation and reduce risks to IMF resources. There are steps a country must agree to take before the IMF approves financing. Examples of these are elimination of price controls, subsidies, monetary and credit aggregates, international reserves, fiscal balances, and external borrowing, ceiling on government borrowing, minimum level of international reserves, minimum domestic revenue collection, minimum level of social assistance spending and so on and so forth.
The most important function of the IMF is its ability to provide loans to member nations in need of a bailout. The IMF attaches conditions to these loans, including prescribed economic policies, to which borrowing governments must comply. The IMF gives loans to countries in economic trouble. In exchange, countries must implement a programme of painful policy reforms. Countries rarely complete these programmes. Countries must meet policy conditions in regular reviews to gain access to tranches of funding. Failure to implement them interrupts the programme. The high failure rate may indicate that the IMF’s programmes may be unimplementable by design. They simply entail too many policy conditions. Even neoliberal reform-minded governments struggle to implement them.
And programme failure has serious repercussions for economic development. Failure sends a negative signal to markets, causing them to lose confidence in the ability of governments to stabilise the economy and undertake reforms. The result very often is a rise in inflation and increases in capital flight that deprive countries of much-needed capital for investment in public goods and services. Some have blamed the failure rate on a lack of motivation by borrowing governments. Facing pressures from special interest groups, such as labour unions and business groups, governments often backpedal from previous commitments.
In addition, it has been found that countries that are friends with powerful donors like the US also experience more implementation failure. They receive favourable treatment, such as regaining access to IMF loans much faster than other countries, creating a moral hazard problem. In other words, encouraging bad behaviour.
Conditions to privatise state-owned enterprises, liberalise prices and overhaul the public sector were especially prone to cause implementation failure. This is because these conditions mobilise domestic opposition that can thwart programme implementation. Usually, trying to kill this opposition some governments have turned tyrannical – denying citizens their fundamental rights and freedoms of protest, assembly and expression.
Researchers have also ruled out that implementation failure was driven by the occurrence of a financial crisis, macroeconomic instability, domestic opposition to policy reform, or geopolitical factors.
Investors rate a country lower when it has a permanent interruption of an IMF programme.
Programme interruptions lead to adverse financial market reactions. When investors lose confidence in a country’s ability to undertake market-liberalising reform, they require higher interest rates on their loans. Borrowing countries that failed to implement IMF programmes therefore faced the risk of more volatile capital flows and higher refinancing costs. Ultimately, higher financing costs made them even more dependent on the Fund, entrapping them in a cycle of dependency.
Given the detrimental effects of IMF programme interruptions for developing countries, it is puzzling that the reform of IMF conditionality is lagging.
The IMF has often blamed weak capacity and lack of “political will” for poor implementation. This predominant view was challenged by Horst Köhler, a former IMF managing director, who launched a “streamlining initiative”. Its goal was to reduce the number of conditions.
But the number of conditions remained high. This is partly because of the rigid process by which new IMF programmes come about.
There’s a need for greater leadership to ensure policy coherence in IMF programmes. This is even more important right now with a record-high number of 80 new IMF lending arrangements due to the COVID-19 crisis in developing countries. Under the dual COVID-19 health and economic crises, these programmes run the risk of having too many conditions. This may drive countries into financial disaster and back to the IMF again. This is the perilous path our new government is celebrating embarking on!