The IMF s Financial Crisis Loans: No Change in Conditionalities

Transcription

1 TWN Global Economy Series 30 The IMF s Financial Crisis Loans: No Change in Conditionalities BHUMIKA MUCHHALA TWN Third World Network

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3 The IMF s Financial Crisis Loans: No Change in Conditionalities BHUMIKA MUCHHALA TWN Third World Network

4 The IMF s Financial Crisis Loans: No Change in Conditionalities is published by Third World Network 131 Jalan Macalister Penang, Malaysia. Website: Third World Network 2011 Printed by Jutaprint 2 Solok Sungei Pinang 3, Sg. Pinang Penang, Malaysia. ISBN:

5 CONTENTS 1 INTRODUCTION 1 2 OBJECTIVES AND POLICY FRAMEWORKS OF THE IMF s CRISIS LOANS 4 3 THE IMF s FISCAL POLICY CONDITIONALITIES 7 4 THE IMF s MONETARY POLICY CONDITIONALITIES 10 5 FUNDAMENTAL REFORM OF THE IMF IS NEEDED 12 APPENDIX 1: IMF FINANCIAL CRISIS LOANS 14 APPENDIX 2: THE INTERNATIONAL MONETARY FUND: RHETORIC VERSUS REALITY 19

6 NOTE This paper was presented at a consultation session of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System (Stiglitz Commission) in Geneva on March 28, 2009.

7 Chapter 1 INTRODUCTION THE International Monetary Fund (IMF) had suffered a sharp decline in its lending business in recent years until the present global financial crisis led to an unprecedented resurgence in lending. The Group of 20 (G20) major economies have economically and politically legitimized the IMF by trebling its resources as well as by reinforcing its role as 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 comes up to well over $50 billion. As the global financial crisis wreaks havoc in both the financial sector and the real economy across North and South, world leaders and global institutions are issuing ominous warnings of a repeat of the Great Depression of the 1930s. The projected global growth rate for 2009 is 0.5%, the lowest level since World War II. 1 Leading economic institutions and publications state that the impacts of the global financial crisis on the real economy worldwide will only continue to unfold and intensify throughout Rich-country banks lie in disarray, credit markets are clogged, demand is contracting across borders, exports are shrinking by the day, and capital is becoming harder to access as public debt mounts and foreign exchange reserves dwindle. However, at the centre of the twin crises in both the financial 1 International Monetary Fund, World Growth Grinds to Virtual Halt, IMF Urges Decisive Global Policy Response, IMF Survey online, January 28, 2009, external/pubs/ft/survey/so/2009/res012809a.htm. 1

8 and economic sectors, the IMF is experiencing a revival of its relevance, particularly by the G20 forum and European leaders. The widening current account deficits of emerging-market and developing countries, in an environment where bilateral and private market creditors are increasingly unwilling to lend and capital flows are plummeting or reversing, have enabled the IMF to get back into business through its financial loans. Beginning in September 2008, the IMF has to date negotiated Standby Arrangement (SBA) loans with nine countries: Georgia, Ukraine, Hungary, Iceland, Latvia, Pakistan, Serbia, Belarus and El Salvador. Countries that have recently requested SBA loans are Guatemala, Costa Rica and Turkey, and more are expected. SBAs comprise the bulk of the Fund s lending portfolio and are designed to address balance-of-payments problems in developing and emerging-market countries. The typical programme length is between 12 and 24 months, and repayment, at non-concessional interest rates, is due within 3¼-5 years of disbursement. IMF documents describe SBA loans as the Fund s workhorse lending instrument for crisis resolution. 2 Unlike the Flexible Credit Line designed for countries with strong macroeconomic fundamentals and a proven track record with the Fund which does not carry any conditionalities, the SBA loans carry macroeconomic and structural policy conditionalities. The nine loans disbursed between September 2008 and February 2009 range from a low of $523 million for Serbia to a high of $16.4 billion for Ukraine. They are the largest loans disbursed in the IMF s history, and reflect the recent doubling of loan access limits to 600% of member-country quotas. Although the SBA loan facility has also been made more flexible by allowing immediate access to funds and a reduction in the frequency of reviews, these provisions are contingent on how stable the IMF deems the country s macroeconomic policies to be. 2 International Monetary Fund, IMF Implements Major Lending Policy Improvements, March 24, 2009, 2

9 The majority of loans are clustered in Central and Eastern Europe, as a result of this region s high exposure to US and European financial markets and banks as well as the fast-paced nature of financial liberalization in many of these countries. However, the regions of South Asia and Latin America are fast joining the IMF s crisis lending portfolio, implying a geographically diverse and complex range of national contexts in policy and politics. The chart titled IMF Financial Crisis Loans in Appendix 1 outlines the Fund s policy conditions and recommendations in the first nine SBA loans. The loan details, as stated in the official loan documents that are publicly available on the IMF s website, cover the areas of fiscal policies, monetary and exchange rate policies, and financial sector policies. This preliminary assessment reveals that the IMF continues to impose procyclical fiscal and monetary policies whose objective is to lower fiscal deficit and inflation levels by reducing public spending and increasing official interest rates. The Fund s fiscal and monetary macroeconomic targets continue to be oriented on a downward bias, which reflects the same overall trend as in loans over the past years as well as during times of financial crises. 3

10 Chapter 2 OBJECTIVES AND POLICY FRAMEWORKS OF THE IMF s CRISIS LOANS A SURVEY of the objectives stated at the premise of each SBA loan document reveals what issues the IMF is primarily concerned with. In each of the nine loans, the key objective of macroeconomic stability is linked to a tightening of monetary and fiscal policies. Other significant objectives are rebuilding international reserves which have fallen to dismal levels, inflation reduction, sustaining capital inflow and averting capital flight, preventing currency depreciation, banking sector reforms and the provision of financial sector liquidity. While these objectives are myriad and numerous, the central goal of most of the objectives is to secure investor and depositor confidence by implementing an overall framework of macroeconomic adjustments buffering up international reserves, and, for most loans, to establish a flexible, or marketbased, exchange rate regime. In the IMF s macroeconomic framework, this critical confidence of foreign investors is obtained and maintained by achieving stable macroeconomic indicators in fiscal, monetary and exchange rate policies. This reassures the IMF s creditors as well as investors that the Fund s loan as well as foreign debt will be honoured. In turn, this security felt by investors ensures that capital outflows will not occur. The Fund acknowledges the influence its loans have in facilitating access to multilateral institutions funds, reducing uncertainty about the country s economic and financial situations and, importantly, in the credit rating ascribed to the national economy. The nine SBA loans have fiscal tightening policy conditions centred on reducing the fiscal deficit as a percentage of the national gross domestic 4

11 product (GDP). The target deficit levels range from a high of 4.9% of GDP in Latvia and 4.2% of GDP in Pakistan to a median of 3.9% in Iceland and 3.75% in Georgia, to a low of 2.8% in El Salvador, 2.5% in Hungary, 1.75% in Serbia and a zero overall balance in Ukraine and Belarus. In Ukraine the Parliament will pass a 2009 budget consistent with a zero-deficit target, and in Belarus a balanced government budget is seen as necessary to contract demand and consumption as well as slow investment and wage growth. The IMF s rationale for the fiscal tightening is that it is required to cool an overheated economy and to adjust to serious constraints in the access to capital. The average fiscal deficit target across the nine loans is 2.64% of GDP. This fiscal deficit lowering is to be achieved through fiscal consolidation plans which involve restraining and reducing public expenditure as a percentage of GDP. This entails curbs on public sector wages, pensions and other social transfers such as minimum wage increases, elimination of subsidies (primarily for fuel and gas), tax reforms and increases, and, in the case of Belarus and Pakistan, increases in utility tariffs. In Ukraine, the IMF recommends generating public savings by freezing public wages, pensions and social transfers, postponing for two years any increases in the minimum wage and eliminating consumer subsidies for imported gas. In Hungary, public sector wages have been frozen while the 13th-month bonus salary for public servants has been eliminated. The Fund has also advised Hungary to cap its pension payments, postpone social benefits and trim the resources of government ministries. In Iceland, the incomes policy agreement between unions and the public and private sectors will aim to significantly reduce wages across the board; and in Latvia, two-thirds of the 2.1-percentage-point reduction in its fiscal deficit will come from a 25% reduction in public sector wages and bonuses in 2009, which is imposed through a ceiling on the Latvian public wage bill. In Serbia, wage growth is to be tightly restricted, while in Belarus the zero fiscal deficit is to be achieved by reducing public sector wages. The elimination of gas and fuel subsidies is the other key mechanism by which public expenditures are advised to be reduced by the IMF. In Ukraine, the Fund states that a pass through of imported gas prices to 5

12 consumers and a reduction in gas subsidies is a central component of public investment cuts. In Pakistan, energy subsidies are to be eliminated while utility tariffs were increased in 2008 by 18%. In Serbia and El Salvador gas subsidies were gradually phased out. 6

13 Chapter 3 THE IMF s FISCAL POLICY CONDITIONALITIES 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 a fiscal deficit reduction 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 two years any increase in the minimum wage and cancelling tax cuts that were previously scheduled for fiscal year 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 programmes in order to bolster aggregate demand and boost consumption, the advice stated in the IMF s loan conditions is a sharp contrast to their statements (see Appendix 2). 7

14 For example, the IMF s SBA loan of $523 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 programme in the eyes of foreign investors and the Serbian public [F]iscal policy will in addition need to put a tight constraint on nominal wage growth in government sectors and public enterprises. 3 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. 4 Furthermore, in February 2009, 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. 5 However, as demonstrated in Appendix 1, all nine loan 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 is 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 3 International Monetary Fund, Republic of Serbia: Request for Stand-by Arrangement, January 23, 2009, 4 International Monetary Fund, IMF Spells Out Need for Global Fiscal Stimulus, IMF Survey online, December 29, 2008, INT122908A.htm. 5 International Monetary Fund, Statement by the IMF Managing Director Dominique Strauss-Kahn at the Conclusion of His Visit to Malaysia, Press Release No. 09/29, February 7, 2009, 8

15 spending is 0.6% of GDP, whereas the reduction in public spending amounts to 3.2% of GDP. So, while the IMF can accurately say that social safety spending is being increased in Pakistan, from 0.3% to 0.9% of GDP, it is overshadowed by the fiscal deficit reduction required by the IMF, from 7.4% to 4.2% of GDP. This fiscal deficit reduction is to be achieved by a fiscal consolidation plan, as termed by the IMF, which involves reducing public spending through: (a) an 18% rise in electricity tariffs, (b) the phasing out of subsidies, (c) spending cuts in the government budget, (d) the elimination of tax exemptions in the General Sales Tax and the introduction of a new Value Added Tax law in the parliament, among other aspects. While positive impacts from social spending increases may benefit the national economy, these may well be undermined by the negative impacts from contractionary fiscal policy in a time of economic recession. 9

16 Chapter 4 THE IMF s MONETARY POLICY CONDITIONALITIES 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 advised raising the official interest rate by 600 basis points in 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 The IMF stated that a tightened monetary policy in Iceland would help stabilize the krona currency. The Fund advised a 200-basis-point rise in Pakistan s interest rate, 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 of the G7 leading industrialized 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 10

17 advice demonstrates 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, countercyclical policies that boost public spending and investment while lowering or easing taxes and domestic interest rates are needed in developing countries. The IMF should not be advising developing and emerging-market country borrowers to tighten their fiscal and monetary policies in a procyclical manner and this should be a fundamental policy reform before the Fund is endowed with increased resources through member-country contributions, NAB (New Arrangements to Borrow) increases and gold sales. 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

18 Chapter 5 FUNDAMENTAL REFORM OF THE IMF IS NEEDED THERE is a growing international consensus in support of reform of the governance, accountability and transparency in the Bretton Woods institutions (i.e., the IMF and the World Bank) and other non-representative institutions that have come to play a role in the global financial system, such as the Bank for International Settlements, its various Committees and the Financial Stability Forum. These deficiencies have impaired the ability of these institutions to take adequate actions to prevent and respond to the crisis, and have meant that some of the policies and standards that they have adopted or recommended disadvantage developing countries and emerging-market economies. Major reforms in the governance of these institutions, including those giving greater voice to developing countries and greater transparency, are thus necessary. For the IMF, serious consideration should be given to restoration of the weight of basic votes and the introduction of double or multiple majority voting. 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 and the Bank of the South in Latin America, should be strengthened and used regionally and internationally where possible. Mechanisms such as international debt arbitration should also be established to address the increasing debt burdens of developing countries. Additionally, regional efforts to augment liquidity should be supported. For instance, extension of liquidity support under the Chiang Mai Initiative 12

19 without an IMF programme requirement should be given immediate consideration. Regional cooperation arrangements can be particularly effective because of a greater recognition of cross-border externalities and greater sensitivities to the distinctive conditions in neighbouring countries. Due to the inherent procyclical policy bias of the IMF as a lender of last resort, the G20 should not seek to replenish IMF funds and should not legitimize a central role for the IMF as the primary crisis lender. The G20 should instead place emphasis on maintaining aid and capital flows, particularly from the G8 donor countries, while strengthening the capacity of regional lending arrangements across developing countries. 13

20 Appendix 1 IMF Financial Crisis Loans Georgia Ukraine Hungary Iceland Latvia Pakistan Serbia Belarus El Salvador (Sept 2008) (Oct 2008) (Nov 2008) (Nov 2008) (Dec 2008) (Dec 2008) (Dec 2008) (Jan 2009) (Jan 2009) Stand-by SBA loan for SBA loan for SBA loan for SBA loan for SBA loan for SBA loan for SBA loan for SBA loan for SBA loan for Arrange- $750 million $16.4 billion $15.7 billion $2.09 billion $2.35 billion $7.6 billion $523 million $2.46 billion $800 million ment over 18over 23 over 17 over 24 over 27 over 23 over 15 over 15 over 14.5 (SBA) months. months. months. months. months. months. months. months. months. Loan Objectives: Objectives: Objectives: Objectives: Objectives: Objectives: Objectives: Objectives: Objectives: 1) Rebuild 1) Financial 1) Improve 1) Prevent 1) To arrest 1) Restore 1) Safeguard 1) Facilitate 1) Precautionary international sector liquidity, fiscal currency the immediate macroeconomic macro-stability an orderly loan meant to reserves and deposit sustainability depreciation liquidity crisis stability through via fiscal adjustment to improve the sustain guarantees and and liquidity for and avert througha tightening of tightening, external country s private capital debt resolution domestic capital flight banking sector monetary and inflation shocks. financial inflows to frameworks. financial through tight reforms. fiscal policies. targeting and defences by restore investor markets and monetary financial sector 2) Address providing confidence and 2) Adjustment banks. policy and a 2) To ensure 2) Ensure social buffers. pressing liquidity. donor support in to the large flexible long-term stability and vulnerabilities reconstruction external shock 2) Secure exchange rate. external adequate 2) Bolster through2) Central goals efforts. and inflation confidence and stability and support for the market strong macro- are to facilitate reduction. external 2) Restructure maintain the poor and confidence adjustments access to 2) To focus financing. banks in order exchange rate vulnerable in through a and structural multilateral on national to restore peg. Pakistan. managed float reforms. World Bank and reconstruction financial exchange rate Inter-American by reducing stability; and and boosting Development the fiscal deficit, reduce production and Bank loans, and tightening expenditures exports. to secure investor monetary policy due to soaring confidence by and returning public debt reducing the exchange levels. uncertainty over rate to a flexible the country s regime. economic policies.

21 15 Georgia Ukraine Hungary Iceland Latvia Pakistan Serbia Belarus El Salvador (Sept 2008) (Oct 2008) (Nov 2008) (Nov 2008) (Dec 2008) (Dec 2008) (Dec 2008) (Jan 2009) (Jan 2009) Fiscal 1) Current 1) The fiscal 1) Fiscal 1) Given sharp 1) With a -5% 1) Reduction 1) Fiscal policy 1) Fiscal 1) The fiscal Policies spending is deficit for deficit targeted deficit and public growth rate in the fiscal is to tightly tightening deficit target to be reduced 2009 is to decrease from debt increases, for 2009 deficit from restrain wage measures is 2.8% of from 26.6% of targeted at a 3.4% to 2.5% the fiscal deficit and the 7.4% of GDP growth in the aim to contract GDP for 2009, GDP in 2008 to zero overall of GDP. is targeted at threat of a in 2007/8 public sector. demand and while social 23.1% in balance 3.9% of GDP double-digit to 4.2% in Subsidies are consumption and programme The aim is to free (quantitative 2) Public in fiscal deficit 2008/9, to be phased slow investment financing is state funds for performance expenditures Deficit- next year, the involving out, and and wage growth, constrained in relief and criterion). to be reduced financing will budget deficit spending spending deemed necessary a public sector reconstruction Parliament is by 2% of GDP occur through is to be reduced cuts and on goods due to an over- deficit target (estimated at to pass the 2009 through a public fund from 7% of GDP elimination and services heated economy of 2.2% $1 billion in budget consistent fiscal consolida- purchases of to 4.9% through of energy frozen in and constraints on requiring tax damages to with a zero- tion plan premised government fiscal tightening. subsidies. nominal access to capital. increases civilian deficit target. on not using securities. terms, although Measures entail and cuts in infrastructure) and contingency Roughly one- 2) Spending spending targeting a expenditure, to demonstrate 2) Public reserves, and 2) A fiscal third of the on social for small balanced govern- especially macro-stability savings are to aimed at consolidation tightening will safety nets to and medium- ment budget, energy (gas to multilateral be generated reducing the plan is the come from increase from sized reducing public and transport) and bilateral via: a) state s borrowing priority for Value-Added Taxes 0.3% to 0.9% enterprises, sector wages, subsidies. creditors whose freezing public requirements. 2009, and excise of GDP (an firms and increasing utility Public wage financial wages, pensions consisting increases, two- increase of the capital tariffs and increases are assistance is and other social Expenditure primarily of thirds from public 0.6% of GDP account will be reducing direct to be contained necessary for transfers, b) reductions involve significant sector wage cuts, in comparison secured. lending. in order to post-conflict postponing for freezing public wage and reducing current to the 3.2% (Price and wage reduce the reconstruction. two years sector wages, reductions spending by 25%. reduction in 2) The fiscal liberalization is risk of a minimum wage eliminating the in the public deficit target advised to support wage-price 2) The fiscal increases, and 13th-month incomes 2) Incomes policy spending). of 1.75% of the change in the spiral. deficit reduction c) passing salary for public policy will cut public Electricity GDP in 2009 exchange rate is from 6% of through servants, capping agreement sector wages and tariffs were and 1% in 2010 regime.) 2) Reduction GDP in 2008 imported gas pension payments, with bonuses by 25% increased by is deemed vital in public debt to 3.75% of prices to postponing social social in 2009 (indicative 18% and tax to reassure 2) State to 30% of GDP in 2009, consumers and benefits and partners. ceiling on the exemptions investors and deregulation GDP by 2013 following further reducing gas trimming alloca- public wage bill), are to be the Serbian and achieved reductions in subsidies. tions to govern- in order to improve eliminated. public that the privatization through defence spending. ment ministries. competitiveness economy is to spur private expenditure and curb currency stable. sector growth. cuts and tax 3) Cancellation of overvaluation. increases tax cuts planned.

22 16 Georgia Ukraine Hungary Iceland Latvia Pakistan Serbia Belarus El Salvador (Sept 2008) (Oct 2008) (Nov 2008) (Nov 2008) (Dec 2008) (Dec 2008) (Dec 2008) (Jan 2009) (Jan 2009) Monetary 1) There will be a 1) The main 1) Monetary 1) The interest 1) Monetary 1) Monetary 1) Inflation 1) The official N/A and return to a market- goal for policy is to bring rate was policy has policy will be targeting aims interest rate Exchange based exchange rate monetary policy inflation back to increased by been to raise tightened to reduce has already Rate regime in 2009, is to reduce the official 600 basis the official through an Consumer been raised, Monetary Policies while monetary inflation from target of 3% by points to 18% interest rate interest rate Price Index (CPI) and will and policy is based 25.5% in 2008 early 2010 to in October by 600 basis increase of 200 levels from 9.5% continue to be exchange on an inflation to 17% in 2009, be achieved by 2008, deemed points in basis points to in 2008 to 8.0% increased in rate policy targeting regime, set and further tightening the necessary to Domestic 15%, and in 2009 and 6.5% order to support is not to reduce inflation down to 5-7% interest rate stabilize the demand through in This is the new available from 10% in 2008 by over a 2-year krona currency. contraction is establishing an to be achieved exchange rate for El to 7.6% in Liquidity will be horizon advised in interest rate by increasing regime, which Salvador. The IMF asserts a withdrawn by (quantitative Premature order to curb corridor, under official interest consists of a commitment to low restoring reserve performance relaxation of wage and the rationale rates. wider inflation and requirement criterion) and monetary price inflation. that international bandwidth. maintains that the rules and raising restraining policy is reserves will be 2) The medium-term goal interest rates on nominal wage warned against, 2) The protected and exchange rate 2) A new is single-digit central bank growth. on the exchange domestic policy is to exchange rate inflation. deposits. ground that rate peg is financing of maintain the regime is to be 2) The restoring to be the govern- managed implemented, 2) Quarterly 2) A flexible exchange rate confidence strengthened ment achieved floating as the existing targets are assigned market-based band will will take time in order to through regime in dollar peg to net international exchange rate remain given the foster real market order to hindered reserves (NIR) and and abolish- removed country s depreciation placements absorb inflation net domestic assets ment of the because the dramatic and to afford of government exogenous control. The (NDA), as exchange rate exchange banking the country s securities. shocks. new regime performance criteria. band is advised rate is at sector large implemented The fiscal space in order to meet risk of collapse. financial 2) The State on January 1, between the NDA international devaluation sector Bank of 2009, includes ceiling and the NIR reserve targets from global 2) Exchange liabilities. Pakistan will currency floor decreases (quantitative deleveraging. rate flexibility pursue a devaluation to over the medium performance is to be flexible a new dollar term. criterion). A Due to this maintained, in exchange rate parity and a key structural risk, the IMF order to prevent policy and will switch to a new benchmark is advises capital outflow discontinue currency to cancel the increasing the and loss of financing for basket that can foreign exchange official interest investor the government. better adapt to transactions rate. confidence. external tax. shocks.

23 17 Georgia Ukraine Hungary Iceland Latvia Pakistan Serbia Belarus El Salvador (Sept 2008) (Oct 2008) (Nov 2008) (Nov 2008) (Dec 2008) (Dec 2008) (Dec 2008) (Jan 2009) (Jan 2009) Financial 1) The IMF 1) Restore 1) A bank 1) Following 1) The 1) The 1) Structural 1) Financial 1) Close Sector advises a banking support the October Latvian transition to a reform sector reforms monitoring Policies comprehensive system package 2008 government is single treasury recommendations highlight the of bank assessment of liquidity via consisting of nationalization advised to claim account and consist of need to purge liquidity the banking central bank a blanket of three major full ownership banking privatizing and the banking and system s and ensure guarantee of Icelandic and capitalize legislation restructuring system of short-term vulnerabilities bank solvency all bank banks, the the private bank, amendments socially- and directed borrowing, and risks, and throughdeposits, government is Parex, thereafter will occur via state-owned lending in and improvements in monitoring liquidity for to recapitalize returning it parliamentary enterprises and order to strengthening managing liquidity. and supervision. banks and a the banks to a to the private approval by phasing out strengthen financial guarantee fund capital sector as quickly end-june 2009, state ownership banks capital sector 2) The for inter-bank adequacy ratio as possible (with with the result in banks and positions and regulation independence and lending. of at least 10%. participation of of strengthening insurance. incentivize and capacity of the the European State Bank of risk supervision Financial 2) Capital 2) A concerted Bank for Pakistan 2) The management to enable Supervision Agency Base strategy of Reconstruction enforcement development for both banks banks to and its cooperation Enhancement bank and of banking of local and weather the with the central bank Fund to restructuring Development supervision. currency bond borrowers. crisis. are to be bolster banks involves asset to boost capital markets and a significantly capital valuation and and liquidity). 2) A public debt 2) Financial 2) Enhance strengthened. adequacy recovery, contingency management sector financial ratio to 14%. depositor and 2) Banking plan for strategy is advice sector crisis creditor system handling advised, while supports capacity insurance, vulnerabilities problem banks the financial maintaining through supervision are to be was produced transfer tax will the already liquid asset and an reduced through in December be eliminated enacted requirements, insolvency supervision by from the 2009 blanket external framework. independent budget. deposit credit lines auditors and by guarantee, but for the boosting the calls for central bank crisis response refining and close capacity. financial monitoring liquidity and of banks. solvency Improve the frameworks. access to, and the profile of, budget financing.

24 References International Monetary Fund, Georgia: Request for Stand-by Arrangement, October 6, 2008, International Monetary Fund, Ukraine Stand-by Arrangement Review Under the Emergency Financing Mechanism, January 22, 2009, external/pubs/ft/scr/2009/cr0917.pdf. International Monetary Fund, Hungary: Request for Stand-by Arrangement Staff Report; Staff Supplement; and Press Release on the Executive Board Discussion, November 17, 2008, International Monetary Fund, Iceland: Request for Stand-By Arrangement Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Iceland, November 25, 2008, / International Monetary Fund, Republic of Latvia: Request for Stand-by Arrangement, January 9, 2009, International Monetary Fund, Pakistan: Request for Stand-By Arrangement Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Pakistan, December 2, 2008, / International Monetary Fund, Republic of Serbia: Request for Stand-by Arrangement, January 23, 2009, International Monetary Fund, IMF Executive Board Approves US$2.46 Billion Stand- By Arrangement for Belarus, Press Release No. 09/05, January 12, 2009, / International Monetary Fund, Transcript of a Conference Call on Belarus with Juha Kahkonen, Senior Advisor, European Department, and Neven Mates, Mission Chief for Belarus, European Department, January 12, 2009, external/np/tr/2009/tr htm. International Monetary Fund, El Salvador: Request for Stand-By Arrangement Staff Report; Staff Supplement and Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for El Salvador, February 24, 2009, 18

25 Appendix 2 The International Monetary Fund: Rhetoric Versus Reality What the IMF says: For a year now, since I spoke at Davos last January, the Fund has advocated fiscal stimulus to restore global growth. There is now a broad consensus on this. Dominique Strauss-Kahn, IMF Managing Director 1 I would put it even more starkly. 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. Olivier Blanchard, IMF chief economist 2 Monetary and fiscal policies need to become even more supportive of aggregate demand and On fiscal policy... the key here is to design packages that provide maximum boost to demand, which argues for measures to increase spending. Olivier Blanchard, IMF chief economist 3 What the IMF does: Reflecting the procyclical fiscal stance since 2006 and limited budgetary financing options, there is no scope now for countercyclical fiscal loosening. Anything less than a tight fiscal stance could also jeopardize the credibility of the programme in the eyes of foreign investors and the Serbian public... [F]iscal policy will in addition need to put a tight constraint on nominal wage growth in government sectors and public enterprises. IMF Standby Arrangement loan programme for Serbia 4 19

26 Tight fiscal and wage policies have already been put into place, together with structural reforms in key areas, in order to restore macroeconomic stability and return the economy to a higher growth path by IMF Stand-by Arrangement loan for Latvia 5 We are strongly committed to low inflation and, in the current environment, believe that maintaining single-digit inflation and reducing it gradually in the medium term is essential. IMF Stand-by Arrangement loan for Georgia 6 1 International Monetary Fund, Statement by the IMF Managing Director Dominique Strauss-Kahn at the Conclusion of His Visit to Malaysia, Press Release No. 09/29, February 7, 2009, 2 International Monetary Fund, IMF Spells Out Need for Global Fiscal Stimulus, IMF Survey online, December 29, 2008, INT122908A.htm. 3 International Monetary Fund, World Growth Grinds to Virtual Halt, IMF Urges Decisive Global Policy Response, IMF Survey online, January 28, 2009, external/pubs/ft/survey/so/2009/res012809a.htm. 4 International Monetary Fund, Republic of Serbia: Request for Stand-by Arrangement, January 23, 2009, 5 International Monetary Fund, Republic of Latvia: Request for Stand-by Arrangement, January 9, 2009, 6 International Monetary Fund, Georgia: Request for Stand-by Arrangement, October 6, 2008, 20

27 THE IMF S FINANCIAL CRISIS LOANS: NO CHANGE IN CONDITIONALITIES During the global financial crisis of , lending by the International Monetary Fund (IMF) surged as countries faced acute financing shortfalls amid the economic turmoil. However, as with most IMF credit over the years, these crisis loans came attached with contractionary policy conditionalities whose procyclical nature has long been a cause for concern. Examining the provisions in the official IMF loan documents, this paper finds that the IMF required borrowing countries to implement austerity measures in fiscal and monetary policy to attain macroeconomic stability or, in other words, low levels of deficit, inflation and external debt. Government budget deficits and inflation were to be brought down by cutting public spending and raising interest rates, among other measures such as regressive tax policies. In light of concerns over the adverse impacts of such austerity policies in a time of global downturn, this paper recommends a rethink of procyclical IMF loan conditionality. In the context of global crisis contagion, policysetting international financial institutions should not be advocating budget cuts and interest rate hikes. Rather, expansionary, or Keynesian, macroeconomic policy should be supported in crisis-affected countries, such as fiscal stimulus and public spending measures to revive domestic economic activity, aid domestic firms and citizens severely affected by the crisis, promote employment creation and protect essential services in health, education and pension sectors. In addition to this policy reassessment, the paper also calls for reform in IMF governance, such as transparency in the formulation and distribution of IMF policy reports and fair representation and voice for developing countries in the Fund s decision-making. BHUMIKA MUCHHALA is a researcher with the Third World Network in the area of finance and development. TWN GLOBAL ECONOMY SERIES is a series of papers published by Third World Network on the global economy, particularly on current developments and trends in the global economy, such as those involving output, income, finance and investment. It complements the TWN Trade and Development Series which focuses on multilateral trade issues. It aims to generate discussion on and contribute to appropriate policies towards fulfilling human needs, social equity and environmental sustainability. 1