IMF Confidence Crisis

As International Monetary Fund (IMF) and World Bank officials engage in their joint semi-annual meetings in Washington, the Fund has a nettlesome new task: convincing its shareholders (most of the world’s governments, represented at the meeting by Finance Ministers and Central Bank Governors) that the institution should continue to exist.

After some 30 years of making “bail-out” and “structural adjustment” loans to indebted and impoverished countries in return for their adherence to a long list of neo-liberal economic reforms–trade and investment deregulation, privatization, tightening access to credit, and rapid budget cuts and public-sector layoffs, to name a few–the IMF has been confronting a crisis of confidence for the past two years. Demand for its services has been shrinking. Its reputation has never recovered from its disastrous interventions in the East Asian and Argentinean financial crises (1997-1998 and 2001-2002 respectively).

The IMF was jolted out of any lingering complacency in mid-December 2005, when Brazil unexpectedly announced that it was paying off all its IMF loans ahead of schedule. Two days later, Argentina said it would follow the same course. Less diplomatic than the Brazilians, Argentine President Nestor Kirchner made it clear that he saw the move as an emancipation from the suffocating conditions imposed for decades by the IMF.

Liberation

After the two South American countries, who happened to be the IMF’s largest borrowers, set the example, others followed. Serbia, Indonesia, Uruguay, and the Philippines made similar announcements. With the addition of Indonesia to the list, three of the four largest debtors to the IMF had liberated themselves. The fourth, Turkey, is reportedly considering taking the same step before the end of 2007. With all these early repayments, and the gathering certainty that virtually no “middle-income countries” would be giving the IMF more business, it soon appeared that the IMF might face a crisis of solvency. Indeed, the institution is expected to post its first loss in decades–about $100 million–this year.

After six months of high-level public fretting about the IMF’s relevance and role, the Fund’s shareholders gathered again last April in Washington to hear Managing Director Rodrigo Rato announce the IMF’s new role: it would convene talks among the major economic powers with the aim of reducing the huge imbalances that have recently plagued the global economy. It was widely assumed that the two big topics would be China’s currency valuation and U.S. deficits–and with the accent on the former, given that the United States is the Fund’s largest shareholder. The Ministers and Governors smiled broadly and declared that the IMF had found its new path.

Coming Up Empty

Now, with the IMF’s semi-annual roll into the limelight just around the corner, its “new role” can no longer avoid examination. After all the hearty handshakes last year, it appears that its attempt to get its five chosen economic powers–the United States, the Eurozone (the European Union nations that use the euro as their currency), Saudi Arabia, Japan, and China–to sit down and hammer out some hard decisions has come up empty. While no one has issued a press release declaring the failure of the initiative, virtually no one is saying anything about it.

Another well-advertised glittering coat has failed to cover the ailing emperor’s nakedness, and for now at least, the courtiers are trying to look the other way. It has been left to the usually-reticent Japan to at least acknowledge that there will be nothing to report at the April meetings.

With the new function that mollified the official critics apparently a non-starter, it seems only logical to assume that hand-wringing about the relevance and future of the IMF will return to dominate conversations at the meetings.

Of course the IMF still has some of its “old role” left to play. While most of Asia and Latin America may have headed for the exits, the IMF can still play financial viceroy in some of the world’s poorest countries–mainly in Africa, with a few in Central America, the Caribbean, and Southeast Asia. Those countries are in no position to pay off their IMF loans early, and still need the IMF’s “seal of approval” to attract credit and grants from other sources.

Poor Record

So it can hardly have been welcome news for Mr. Rato and his colleagues in IMF management to have two high-profile reports released in the last two months, one from a commission jointly appointed by the IMF and the World Bank and the other from the IMF’s own internal watchdog, slamming its record in low-income countries, and Africa in particular.

The commission http://www.imf.org/external/np/pp/eng/2007/022307.pdf looking at IMF-World Bank cooperation, chaired by former Brazilian Finance Minister Pedro Malan, suggests that the IMF stop making loans to low-income countries, leaving that responsibility to the Bank. The report also notes that the issue of “fiscal space” – the IMF’s insistence that low inflation targets must be maintained even as they limit growth and critical health and education programs–has caused increasing friction between it and the World Bank.

The second report, “An Evaluation of the IMF and Aid to Sub-Saharan Africa,” http://www.imf.org/external/np/ieo/2007/ssa/eng/pdf/report.pdf from the IMF’s Independent Evaluation Office, goes further in raising questions about the Fund’s philosophy and practice for the last 30 years. Indeed it is the strongest critique of core IMF practice to come from the IEO, established after the application of external pressure in 2001, or any other part of the IMF.

The IMF has, to put it a little less diplomatically than the report does, been lying to Africa and the world about what it does on the continent. In 1999, in reaction to the notoriety the IMF’s “structural adjustment programs” had garnered in nearly a hundred developing countries, the IMF announced a shift in how the policy conditions attached to its loans would be determined. Under the new “Poverty Reduction & Growth Facility” (PRGF), which replaced the Enhanced Structural Adjustment Facility (ESAF), the policies were to be determined through consultations between government and citizens groups.

But the report finds that although the IMF consistently claims to have changed its ways, all it has really done is to change the name of the programs. There is little difference, in either process or product, resulting from the transition from ESAF to PRGF. The same harsh austerity measures are demanded from governments with no leverage to resist the IMF, and input from civil society, or from any part of the government besides the Finance Ministry, is ignored.

The report finds that the IMF has “done little to address poverty reduction and income distributional issues, despite institutional rhetoric to the contrary.” Looking, like the Malan Report, at the “fiscal space” issue, the report concludes that the IMF has “blocked the use of available aid to SSA [sub-Saharan Africa] through overly conservative macroeconomic programs.” Large chunks of increased aid flows – often as much as 85% in countries that have inflation rates above 5% (an extremely low figure for countries that need to spur rapid growth) – are, on IMF orders, not spent, but instead added to the country’s international reserves, where they avail no poor people of better health care or education.

The IMF, says the report, has also failed to be “proactive in mobilizing aid flows” and has “done little to analyze additional policy and aid scenarios and to share the findings with the authorities and donors.” Given the international community’s consensus on the importance of reaching the much-vaunted Millennium Development Goals, the IMF’s muting of the impact of international aid should be nothing less than a global scandal.

We don’t yet know whether the mounting crises of legitimacy, relevance, confidence, and solvency will be publicly discussed at the IMF and World Bank meetings. But you can be sure they will be the subject of much private conversation. The survival of the IMF, a 3,000-strong international bureaucracy which just opened a gigantic addition to its headquarters building in Washington, is at stake. Unless someone can find a role the IMF can be trusted with soon, a glut of economists, and some prime Washington real estate, may soon flood the markets.

Soren Ambrose is the coordinator of the Solidarity Africa Network in Nairobi, Kenya and a contributor to Foreign Policy In Focus.