The New IMF?

By: Leroy A. Binns Ph.D.

Amidst painful memories of excessive intrusion, the IMF a Bretton Woods configuration and off shoot of the Great Depression is once again saddled with the responsibility of lending short term loans to countries attempting to restore economic stability.

Throughout the passage of time the bank has been accused of obstruction of social justice demonstrated by the economic fate of several Third World countries and later relegated to isolation. Nonetheless confronted with international pandemonium once prosperous nations are now financially deprived of cash flow and like the developing community is in search of a lifeline.

Consequently a consensus at the G20 summit in London last April verbalized a need for the fund to expand its role within the world economy. Despite the capacity to lend upwards of $150 billion a year attendees in fear of inadequacy during a period of intense turmoil pledged to increase the institution’s coffers from $250 billion to $750 billion.

Some Anticipated Resources

 Donors                                                                        Amount

China                                                                           $40 billion

Japan                                                                           $200 billion
Canada                                                                        $10 billion
Norway                                                                       $4.5 billion
America                                                                      $100 billion

Conscious of the stigma associated with its lending practices and urgency to exhibit intellectualism and acquire legitimacy in matters of diagnoses and recommendations the establishment seeks to repair its tattered image by the provision of new lending schemes and the attachment of altered conditions to the disbursement of loans. Yet with a protracted chronicle of contribution to economic disintegration many governments will likely opt for refuge with crisis insurance as protection from the bank’s rogue behavior. To override such apparent trauma the summit’s heads of state also announced implementation of quota changes for 2011 which will restructure the balance of power that determines fair access and treatment.

 IMF Votes

 Nations                                   Existing                                  Proposed

America                                   16.77%                                  16.73%

Japan                                         6.02%                                    6.23%
Britain                                       4.86%                                    4.23%
France                                       4.86%                                    4.23%
China                                         3.66%                                    3.81%
Russia                                        2.69%                                    2.39%
Belgium                                     2.09%                                    1.86%
India                                           1.89%                                    2.34%
South Korea                               1.38%                                    1.36%
Brazil                                          1.38%                                   1.72%

With the financial prerequisites of the world’s poorest countries at an all high of approximately $25 billion to $140 billion and advanced countries facing shrinking budgets in light of an unprecedented recession the IMF is perturbed that aid could dwindle by an estimated 30% when compared to the previous year. Furthermore the fund is knowledgeable that the crisis will trigger a severe impact on growth and external stability in low income countries and has identified a rippling impact as at least 26 countries many of which are oil producing states remain vulnerable to the global meltdown and collapse in commodity prices.  

Setting the tone for the debate is Dominque Strauss-Kahn the former French finance and economy minister and managing director of the IMF who predicts exports from low income countries could decrease in 2009 by 16% with remittances in play during the same period by 10%. He has also indicated that direct foreign investment to low income countries would suffer by as much as 25%.

In an effort of assurance at a Resources for the Future conference in Washington DC Strauss-Kahn told his audience that the days of IMF heavy handedness was over and encouraged the IMF to champion the cause of countries in dire needs. “It is no secret that our lending programs attracted some criticism over the years. People said our conditions were too harsh, too intrusive or even misguided. I accept some of that criticism.” We made mistakes, but we always try to learn from our mistakes. He then proceeded to mention, “We need to make sure that the medicine does not harm the patient. Over the past few years we have been streamlining our conditionalities, focusing on core policy measures that are critical for microeconomics stability, poverty reduction and growth.”

While sympathetic of transfiguration some remain cautious. Journalists Kurt Nimmo and Susan George are opposed to Strauss-Kahn’s interpretation of evolution which promotes emerging economics such as China and Brazil under current conditions. Unfortunately the Chinese miracle as the symbol of atonement might encourage forced illegal and/or unethical labor in which sub-subsistence living conditions for billions of people will be ignored in exchange for cheap goods and services. Both discredit the IMF for its shortcomings in association of human value with nation building.

As recent as the turn of the century the IMF has shown disregard for sovereignty enforcing stringent political reforms while simultaneously overlooking its complicity in insufficient political will or corruption. However the gatekeeper as it is oftentimes labeled for its influence in forging relationships between governments and creditors has been held liable for social unrest resulting from structural adjustment policies that minimize the function of states to provide basic social services to their inhabitants. The following is a synopsis of the ills of the IMF

Common Symptoms of Past IMF Partnerships

Reducing government expenditure via public sector redundancies, frozen salaries and diminished health, education and social welfare services.

The privatization of state run industries producing massive terminations void of social security provision and the loss of services to remote regions.

Currency devaluation and export promotion creating the soaring cost of imports and reliance on international commodity markets

Raising interest rates to rectify inflation. Such extinguishes many small companies.

Removal of price controls resulting in rapid prices rises for basic goods and services

 

On an individual basis the system’s disruption of democracy has been visualized through acts of resentment across continents.

Country Reports

Year           Country                   Amount Borrowed              Outcome                

1998          Brazil                        $18 billion               a tribunal on foreign debt and 

                                                                                    referendum denounced the IMF
                                                                                    and a 24 hour strike was imposed.

2000          Argentina                  $7.2 billion             congress picketed, demonstrations
                                                                                    nationwide some led by unions and  
                                                                                    the Catholic church

2000          Ecuador                     $304 million         indigenous people planned week long

                                                                                  protest calling for the president’s
                                                                                  resignation and an end to austerity
                                                                                  measures imposed by the IMF,
                                                                                  trade unions and the church impose
                                                                                  strikes against IMF reforms.  

1999        Zambia                        $349 million          President Frederick Chiluba blames

                                                                                   the IMF for the country’s economic
                                                                                   crisis. Scores of protesters demand an
                                                                                   end to IMF relations.

 2000           Kenya                      $198 million          opposition party and NGOs protest,

                                                                                   President Daniel Arap Moi complains
                                                                                   of harsh conditions attributed by the
                                                                                   IMF.

Since then the IMF has introduced its new facility which is a agenda for monitoring economic policies in countries not seeking the bank’s assistance. Yet initially Abuja was quoted as saying although such policies would be designed and owned by the respective governments these promises are awaiting fulfillment. Moreover former Canadian Finance Minister Ralph Goodale and US Treasury Secretary John Snow have alluded to the new facility as continuity to impose its conditions on countries even when their obligations to the IMF had been officially terminated.

In an extension of a foregone conclusion former IMF Managing Director Rodrigo Rato concurs “the implementation of this new arrangement called a policy support agreement would represent little change from the monitoring the IMF is already doing in Nigeria. In fact the IMF has monitoring programs with a number of countries that are not borrowing money. By giving these programs a formal name and definition and by publicizing them with supporting papers and press conferences the IMF is making a political point: it is saying more straightforwardly than before that it will be available to impose its views on Southern countries even if they manage to extricate themselves from the multilateral debt and IMF programs.” If such is true what does the IMF have in store for Jamaica during a second encounter?

While many still recollect the first that crippled the island under the socialist leadership of the late Michael Manley during the mid to late 1970s and are therefore skeptical of further association others are convinced in view of globalization and the current international crisis the bank must espouse transformation to sustain viability. Colin Bullock, a lecturer within the Department of Economics at the University of the West Indies, Mona shares his conviction by way of the following characteristics

There is more concentration on overall coherence and quality of a program avoiding the detailed quantities specification of a large number of targets all of which must be rigidly observed every quarter.

There is preference for countries to own and if technically capable specify their own economic program

The IMF currently disregards preconditions for negotiation and is willing to acknowledge a plurality in means to achieve an end.

The IMF has rescinded the notion that all balance of payment problems result from an overvalued exchange rate in need of correction by depreciation.

The IMF has become more flexible in its stance against subsidized interest rates and directed credit.

The IMF has long denounced its position that market forces are automatically and always well intentioned for the disadvantaged.

Political scientist Richard Crawford as well is of the opinion that the IMF has adopted tolerable lending conditions by recalling the fact that the bank has agreed to allow countries such as Belarus, Pakistan, El Salvador and Iceland to develop their own formula for development. In contrast executive director of the Caribbean Policy Research Institute Marie-Kim Spence is unsure as to how countries such as Jamaica would qualify to benefit from new lending arrangements such as the IMF’s credit line for emerging market economies. She also questions the effectiveness of rules lacking qualifications regarding timing for the implementation of structural reform or the dismissal of recommendations by the IMF.

Jamaica has been a casualty of reverberating shocks from the worst global financial calamity since the Great Depression.

The Jamaican Dilemma

Budgetary Revelations (in Ja dollars)

Imposed taxes                                                 $47.6 billion (Fiscal year 08/09)

Expenditure                                                    $201 billion (April to Sept 09)
Total income                                                   $135 billion (April to Sept 09)
Deficit                                                             $14 billion (April to Sept 09)
Total Deficit                                                    $52.6 billion (Fiscal year 08/09)

Oil prices in particular which is currently worth $3 billion per annum exploded from 2007 into the succeeding year. In fact the spiraling increase in the cost of oil and rice accelerated by 38.9% and 138.6% respectively between December 2007 and late July 2008 jolting inflation to a high of 26.5% by mid 2008 and public debt obligation at present to 56% of the total budget. Misfortune also included foreign remittance valued at a monthly decline of $20 million and a disruption within the tourism industry and elsewhere restricting capital from private international creditors.

Unfortunately the Economist Intelligence Unit foresees the Jamaican economy will decline by 1.6% in 2010 followed by unpersuasive growth of 0.2% in 2011 a contraction largely victim to crime and a burdensome public debt. Such debilitating analysis is accompanied by the regime’s inflation of up to date estimates of expenditure by $19 billion from $547 billion to $556 billion and an inability to realize its most recent projected $16.8 billion budget curtailment by at least $5 billion due to an acute reduction in revenue. These disturbing circumstances have led to speculation of necessary borrowing from multilateral institutions at interest rates between 1.5% to 4.5% on $400 to $500 million and a triple c rating, down from triple c + and a notch above the default rating from Standard & Poors.

In the end the government’s incapability to access fiscal support from the open market resulted in a February agreement with the IMF which requires effective public reforms to reduce the budget deficit, the creation of a debt strategy to reduce debt servicing costs and the implementation of reforms to the financial sector to reduce risk in return for the sum of $1.28 billion to be dispersed over a 27 month period.

Partial Disbursement Plan of the IMF Loan to Jamaica

Month/Year                                                                 Amount

Feb 2010                                                                     $650 million

May                                                                             $100 million
August                                                                        $50 million
Nov                                                                             $50 million
Feb 2011                                                                     $200 million

According to Strauss-Kahn, “Protecting the most vulnerable Jamaicans is a key concern of this program. To help soften the impact on the poor, the program allows for at least a 25% expansion of the social safety net, in particular the Program of Advancement through Health and Education (PATH) and the school feeding program. The coverage of these programs will be expanded to about 360,000 people from the current 325,000.”

In addition the IMF has responded to its cynics and multiplied its financial offerings to destitute states by raising the bar from $1.5 billion in 2008 to over $3.5 billion by early 2010. A portrait of the contemporary persona engulfs

Mobilization of additional resources – encompassing the sales of gold to boost the fund’s lending potential to approximately $17 billion through to 2014 with $8 billion for the first two years.

Interest relief – zero payments on outstanding concessional loans to indigent states until 2011

Improved concessions – a regular examination of annual interest rates to preserve a greater level of concessionality.

New financial instruments – extended credit facility (flexible medium-term support), standby credit facility (short-term and precautionary needs) and rapid credit facility (emergency support with limited conditionality).

At this point in time oil rich Nigeria is but one of a few specimen of a maturing IMF relationship through a policy support agreement which was introduced to promote debt reduction on a $28 billion loan with the Paris Club. In words of adulation a previous Finance Minister Ngozi Okonjo-Iweala acclaimed, “We are the pilot for the program. The IMF makes sure it is as stringent as an upper credit tranche program and then monitors it like a regular program but the difference is that you develop it and you own it.” Thus far a combination of prior oversight and the new arrangement which imposed spending restrictions and reorganization has been credited during its first years of implementation for a decrease in the nation’s inflation rate from 20% to 10% and a surge to $20 billion in foreign reserves. Another glimmer of hope is the potential to build on the country’s partial payments of 50% ($1 billion) for two consecutive years to the Paris Club lenders.

In summation it is premature to predict favorability for the IMF as its vibrancy is dependent on unwavering loyalty to enhanced communications with its associates, updated surveillance of financial stability and intensification of international coordination and policy making processes. Reflection of today’s global realities is pivotal to the establishment’s mission of realignment.