IMF’s tough love gets even tougher

Jesse Griffiths and Nessa Ní Chasaide examine IMF conditionality and ask what can be done about its undue influence on policy.

IMF’s tough love gets even tougher

AS world leaders gather in Washington this week for the World Bank and IMF Spring meetings, the European Network on Debt and Development (Eurodad) has launched important research examining the policy changes the IMF currently requires borrowers to make. Eurodad sought to answer the now often-posed question: Has the IMF changed?

The question is a relevant and important one, not least in the Irish context, where the IMF’s role in the troika programme is shrouded in secrecy. Three years after the December 2010 troika agreement, the current Irish Government does not identify the precise stance of each troika member on the possibility of debt cancellation. There is anecdotal evidence that the IMF was the better of three evils in the troika as it supported partial cancellation of the socialised banking debt in Ireland, which was opposed by the ECB/EC.

As recently as December 2013, Finance Minister Michael Noonan, in a statement to the European Parliament inquiry into troika actions in the euro area, refused to state clearly who within the troika blocked a debt write-down in 2010, he merely indicated that “bailing in” senior bondholders “was prevented by the troika”.

And therein lies the problem. When citizens pay for debts with policy conditions attached, it is nigh on impossible to judge who is calling the shots — the government or the lender, and in the case of troika countries, which lender? This is why Eurodad’s new research is important: it helps examine if there is a pattern in lenders’ behaviour.

So, has the IMF’s policy conditionality practice changed overall? Eurodad’s answer to this question is definitive. No. And the results of the new research are truly shocking.

While the IMF claims to have seen the light, Eurodad’s research clearly shows that the IMF is going backwards — increasing the number of policy conditions per loan, and remaining inappropriately engaged in highly sensitive and political areas of policy making. By reviewing the policy conditions attached to 23 of the IMF’s most recent loans since October 2011, Eurodad found three major problems:

* First, the number of policy conditions per loan has risen, despite IMF efforts to “streamline” their policy conditionality. Eurodad counted an average of 19.5 structural conditions per programme: a sharp increase compared to the average of 13.7 in previous Eurodad research in 2005-07.

* Second, almost all the countries were repeat borrowers from the IMF, highlighting that the IMF is propping up governments with unsustainable debt levels and not lending for temporary balance of payments problems — the IMF’s true, original mandate.

* And third, there is widespread and increasing use of controversial conditions in politically sensitive economic policy areas, particularly tax and spending, including increases in Vat and other taxes; freezes or reductions in public sector wages; and cutbacks in welfare programmes including pensions. Other sensitive topics include requirements to reduce trade union rights, restructuring and privatisation of public enterprises, and reduction to minimum wage levels.

For example, in Jamaica the IMF included a policy condition that the government must “conclude a multi-year agreement with major unions ... limiting nominal wage increases to zero for 2012/13”. Afghanistan is to “submit [a] Vat law — consistent with IMF advice — aimed at raising the revenue to GDP ratio”. Côte D’Ivoire is to “update and implement a medium-term strategy for controlling the wage bill”. The Solomon Islands is to “submit to parliament draft amendment to income tax, customs and excise tax, and goods tax legislation related to the new mining tax regime in line with IMF technical assistance”.

So what is to be done about this undue influence of the IMF? Campaigners across Africa, Asia and Latin America have long argued “shrink it or sink it”. In other words, pare back its mandate or get rid of it. Indeed, several countries, such as Argentina and Brazil, chose to pay off the IMF in advance rather than tolerate its policy conditionality.

For countries in crisis that have few other options than go to the IMF, the institution should focus on its true mandate — as a lender of last resort to countries facing temporary balance-of-payments crises. Such countries need rapid support to shore up their public finances, not lengthy programmes that require major policy changes.

And there are other options that could be put in place that are less intrusive. For example, Eurodad’s research proposes extending the IMF’s new, but little-used, “Flexible Credit Line” to all lending — in other words a lending stream requiring no conditionality other than the repayment of the loans on the terms agreed.

Is this kind of change possible?

Only with overdue reform of the institution itself. The IMF’s most powerful members refuse to change its utterly archaic mode of governance which allows European governments to appoint the managing director of the IMF in exchange for the US appointing the president of the World Bank. And the powerful countries dominate the decision-making. For example, agreements made in 2010 to increase — by a small amount — the votes of emerging market economies in the institution have been blocked by the failure of the US to ratify them.

The IMF should radically overhaul its governance structure, through introducing a double majority voting system so that approval on decisions is needed from a majority of IMF member countries, in addition to a majority of IMF voting shares. This would provide countries of the global South — the countries longest affected by the institution — a fairer voice and vote.

And the IMF must also drop its ambitions to be an international arbitrator among governments and creditors in debt crises, which is a clear conflict of interest, not least because it is often a major lender to those countries itself.

The finance ministers of indebted countries in Europe and the global South should unite through their membership of the IMF and advocate for these changes. Without structural reform of the IMF, its governance will become more and more detached from global realities, and its unpopular programmes will continue to undermine its effectiveness and legitimacy. While the IMF may be doing a better PR job these days, Eurodad’s research shows it has not changed. It’s time it did.

* Eurodad’s report, Conditionally yours?: An analysis of the policy conditions attached to IMF loans can be found at www.eurodad.org

Debt and Development Coalition Ireland can be found at www.debtireland.org and tweets from @Debt_Ireland

* Jesse Griffiths has been the director of the European Network on Debt and Development since 2012 and was previously co-ordinator of the Bretton Woods Project; Nessa Ní Chasaide has been co-ordinator of the Debt and Development Coalition Ireland since 2006.

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