28 October 2008
In the wake of the global financial crisis, the International Monetary Fund (IMF) is experiencing a resurgence as the world’s "financial crisis firefighter." The upcoming G20 financial summit has placed the IMF as the central institution in charge of “crisis management” and reform of the international financial architecture. While there is much talk of “overhauling” the IMF through fundamental reforms, the same leaders who say this are also talking about broadening the scope of the IMF’s power and influence. Undoubtedly empowered by the contagion of financial meltdown in middle-income countries, the IMF is now scurrying around the globe signing new multi-billion dollar loan deals with a spate of new countries, most notably the Eastern European “Baltic tiger” countries.
As the financial crisis plunges the world into a frenzy of credit-crunch panic and newspaper headlines blare "recession" and "layoffs," the International Monetary Fund (IMF) was, at first, “embarrassingly absent” from the task of financial firefighting. However, at the Annual Meetings of the World Bank and IMF earlier this month, the IMF’s Managing Director Dominique Strauss-Kahn emerged from high-level meetings with a quick and ready fix—the Emergency Finance Mechanism and the Stand-by Arrangement loan.
These loans are being requested by a diverse range of countries teetering on the brink of financial meltdown, from Iceland which is reeling from dried-up liquidity in its banking sector to Pakistan, which has seen its reserves levels swoop down to only a few weeks of import payments. Indeed, within a matter of weeks, the IMF seems to be back in business, back on the negotiating table, and back on the world economic stage. This is a dramatic change from just a year ago, when world leaders and the media warned that the Fund was “in danger of ‘slipping into obscurity.’” After being repeatedly labeled as “irrelevant” and portrayed as obsolete in a new world economy defined by emerging market economies’ economic muscles, the IMF is now being heralded by media headlines that read: “The IMF is back in business” and “The Fund is back in town.”
While rich country leaders are calling for “sweeping overhauls” of the Bretton Woods institutions, and the IMF in particular, as they hastily prepare for a November 15 “Bretton Woods II” global financial summit in Washington, the IMF loaned Iceland $2 billion in coordination with Nordic and Japanese central banks after it was turned away by Russia. Ukraine is to receive a $16.5 billion loan and Hungary will receive $25.1billion from the IMF, World Bank and the European Union (EU). After an unsuccessful attempt to get balance-of-payments financing from China, Pakistan is signing on to a loan program. Nepal has been diplomatically coerced into signing on to the IMF’s concessional loan program, the Poverty Reduction and Growth Facility (PRGF), after its donors implied that aid would be assured upon re-entering an IMF program. Furthermore, in response to the food and fuel price increases, 11 countries with PRGFs (most in Africa) received significant financial boosts, while four countries signed on to new PRGFs. While a few months ago the number of PRGF arrangements stood at 23, they have now increased to 28.
The IMF’s signaling power as financial gatekeeper is on full display in the current loan negotiations.
- After Nepal’s previous 3-year PRGF program expired in November 2007, the government was not interested or willing to renew it despite intense political instability in the country. However, now bilateral and multilateral donors, whom Nepal depends heavily on, have implicitly “suggested the need for reliable international surveillance to ensure that Nepal practices a prudent financial system.”
- In Pakistan, the finance minister made an unsuccessful attempt at requesting China for financial assistance to buffer its foreign exchange reserves, which are now at the IMF’s danger-point of holding less than two months of imports payments. With the “reluctance of donor nations to provide money without strict economic reforms by Pakistan” it is now back at the IMF’s doorsteps.
Double standards in policy advice for the North and South
The Emergency Financing Mechanism (EFM) was activated during the Annual Meetings as the Fund scrambled to respond to the financial shockwaves, which it has amusingly coined as a “financial global warming” on its website. This mechanism was created in 1995, has been used six times since then, and is being pitched by the Fund as a truly rapid emergency process where the Board considers loan requests within 48-72 hours after the IMF and country authorities reach agreement on a lending program and IMF staff draft a report. However, this speedy guarantee is contingent on the member country’s track record with the Fund, as “the rules state that member's past cooperation with the IMF has a strong bearing on the speed with which the Fund can assess the situation and agree on necessary corrective measures to put the economy back on track.”
This emergency finance in response to the financial crisis stands in acute contrast to the Exogenous Shocks Facility (ESF) being pitched to poor countries hit by the food and fuel price crises—which carries the same process modalities as the PRGF and is far from being urgently prioritized by Board discussions as with the EFM. In fact, while Haiti witnessed a major political upheaval stemming from its severe food crisis in early April, the IMF Board got around to discussing boosting lending amounts for Haiti on June 20, almost three months later. Meanwhile, emergency loans for rich countries are being put into motion in a matter of days. This clearly demonstrates a two-tiered prioritization and urgency level of the IMF between the financial crisis in developed countries and the food and fuel crises in developing countries.
The last global financial crisis that the IMF found itself in the limelight was during the Asian financial crisis, which began in 1997, and spread like a contagion through Southeast Asia and then to Russia and Latin America. The Fund is notoriously famous for having exacerbated the Asian financial crisis through its overly austere loan conditionalities to the affected countries. Has the IMF learned its lesson or will it also intensify the economic pain of this current financial crisis? What is already apparent is a certain level of duality in the IMF loan program conditions for Indonesia in 1998 versus Iceland in 2008; there is a significant difference, almost a reversal, of structural conditionality in the banking and financial sector. In Indonesia the IMF ordered the closure and/or privatization of 16 banks, whereas in Iceland, the Fund is not at all prescribing the privatization of Iceland's largest mortgage lender (called the Housing Financing Fund). Does this demonstrate that the Fund has one rule for Northern borrowers and another for Southern? Or is this a sign that the IMF may be fundamentally altering its economic positions having learned lessons from the Asian financial crisis and having a lot to prove in the current one?
Currently, the fund reports that it possesses over $200 billion of “loanable funds and can draw on additional resources through two standing borrowing arrangements with groups of IMF member countries.” As reported in a recent September 2008 factsheet, these two borrowing arrangements are the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB). These are credit arrangements between the IMF and a group of members and institutions. They will provide supplementary financing of up to $53 billion to the IMF to respond to breakdowns in the international monetary system or exceptional threats to the global economy (such as the current financial crisis).
One of the most interesting aspects of the IMF’s sudden re-entry into the lending business is that for the first time in over a decade, it is now servicing its loans programs to high- and middle-income countries as well. Since the world’s middle-income developing countries, such as Brazil to Indonesia, re-paid their debts to the IMF following the Asian financial crisis, the IMF’s loan recipients have primarily been low-income countries who have no other choice but the Fund to access the international credit market.
The current financial crisis has significantly expanded the geographical and economic scope of the IMF and it is this global pervasiveness that has the potential, and the danger, of re-establishing the Fund’s relevance, and thus power. This has many long-time critics of the IMF troubled, as recent years of inactivity had substantially weakened the Fund’s power to shape economic policy across developing countries and challenged its rigid ideology of ‘macroeconomic stability,’ which involves fiscal austerity in public spending, a priority of maintaining low inflation levels despite its anti-developmental trade-offs, and a drive toward low debt levels. Advocates who have worked to dismantle, or at least loosen, the contractionary fiscal and monetary policies attached to IMF’s lending, now have to be wary of a spate of new loans and policy conditions.
Resources
IMF aid for Ukraine and Hungary, BBC News, October 27, 2008 (BBC Online)
International Monetary Fund set to offer $1 trillion lifeline to developing world, by Suzy Jagger, October 24, 2008 (TimesOnline)
No strings attached, The Economist, October 23, 2008 (The Economist website)
The Fund is back in town, by Alex Brummer, October 23, 2008 (New Statesman)
IMF in Talks on Loans to Countries Hit by Financial Crisis, IMF Survey online, October 22, 2008 (IMF website)
Iceland to announce $6bn IMF-led rescue, by David Ibison, October 20, 2008 (Financial Times)
Rebuffed by China, Pakistan may seek IMF aid, by Jane Perlez, October 19, 2008 (New York Times)
European call for ‘Bretton Woods II,” by George Parker, Tony Barber, and Daniel Dombey, October 16, 2008 (Financial Times)
G-8 plans summit on financial reforms, by Henry Chu, October 16, 2008 (Los Angeles Times)
G8 Leaders Statement on the Global Economy, Grand Rapids, Michigan, Office of the Press Secretary, The White House, October 15, 2008 (White House website)
Nepal wants to rejoin IMF program, Xinhua News Agency, October 13, 2008
IMF in global ‘meltdown’ warning, BBC, October 11, 2008, (BBC Online)
Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund, Press Release No. 08/240, IMF, October 11, 2008 (IMF website)
IMF Presses Four-Step Plan to Halt Financial Spiral, IMF Survey online, October 10, 2008 (IMF website)
Amid Crisis, IMF Emphasizes Readiness to Lend Quickly, IMF Survey online, October 9, 2008 (IMF website)
IMF Meeting to Focus on Global Response to Crisis, IMF Survey online, October 6, 2008 (IMF website)
Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development Communiqué, IMF, October 10, 2008, (IMF website)
Quick, Forceful, Cooperative Action Needed on Crisis—IMF, IMF Surveyonline, October 9, 2008 (IMF website)