This article adds food for thought to unbroken criticism targeting the lending policies of the International Monetary Fund (IMF) whereby a gap seemingly persists between the declared intentions and the general practice
By Daniele Dionisio
IMF Conditionalities Still Under the Fire of Criticism
The mandate of the International Monetary Fund (IMF) encompasses duty to facilitate financial stability, international trade, and economic growth, while securing assistance in the form of loans to borrowing countries suffering from balance-of-payments constraints.
As per IMF latest terms (IMF: Conditionality November 6, 2018, just a make-up with respect to March 6, 2018 edition):
When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid. These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF. This system of conditionality is designed to promote national ownership of strong and effective policies.
Conditionality helps countries solve balance-of-payments problems without resorting to measures that are harmful to national or international prosperity. At the same time, the measures are meant to safeguard IMF resources by ensuring that the country’s balance of payments will be strong enough to permit it to repay the loan.
The member country has primary responsibility for selecting, designing, and implementing policies to make the IMF-supported program successful.
Most IMF financing is paid out in installments and linked to demonstrable policy actions. Program reviews provide a framework for the IMF Executive Board to assess whether the program is on track and whether modifications are necessary.
Prior actions… are steps a country agrees to take before the IMF approves financing or completes a review. They ensure that a program will have the necessary foundation for success.
IMF lending has always involved policy conditions…. In recent years, the IMF has become more flexible in the way it engages with countries on issues related to structural reform as the conditionality system continues to evolve.
A bone of contention
In the face of this, critics contend that a gap persists between the rhetoric of declared intentions and the general practice since, as maintained a couple of years ago by Eurodad, ‘…The IMF continues to attach problematic conditions to its loans, notably by suggesting reforms in sensitive economic areas. ‘
So far, loan disbursements have been linked to economic and trade liberalization with regressive consequences for poor people. In most cases conditionalities have involved cutting public spending, including government subsidies, ceilings on government wage bills (common in Africa), and privatization of public services.
The impact of the reform recipes has been highlighted especially in Africa in terms of cuts in public spending and adopting user fees policies which are known to run contrary to poor and vulnerable population settings, especially women.
In addition, the same recipes have also been implemented in some western countries such as Greece where cuts in public spending and dismissal of health workers have led to deterioration in the health of the population.
As such, word is spreading that IMF loans risk spurring unrest and deepening social and economic crisis in the borrowing countries. Under these circumstances, it comes as no surprise that Pakistan refused on 20 November 2018 to accept tough conditions laid down by the IMF for a financial bailout package including conditions to further increase power tariffs, imposition of more taxes and sharing details related to Chinese financial assistance.
Undoubtedly, what highlighted here discloses the institution great power to shape domestic policies in the borrowing countries, though IMF denies any responsibility for its actions and states that only governments are accountable for expenditure priority allocations (aside from a belated mea culpa in the Greece case wherein the IMF has admitted that conditionalities have done more harm than good).
As a matter of fact, regular reviews by the IMF determine whether a loan is released depending on economic performance, not on protection of social spending.
No wonder that this power dynamics makes it very difficult for the recipients of IMF programmes to ignore policy prescriptions, even if they are not legally binding. In this connection, the results of a report released in November 2018 by Eurodad add food for thought through a comparative analysis of the conditions attached to IMF loans for 26 country programmes that were approved in 2016 and 2017.
The study documents that the number of IMF conditions is on the rise (23 out of 26 programmes are conditional on fiscal consolidation), whereby borrowers are forced to ‘…restrict their spending and/or increase their taxes as a result of the loans, contradicting IMF claims that its programmes do not emphasise fiscal contraction.’
Almost all of the analysed country programmes included dispositions on containing governments’ wage bills. Apart from fuelling social turmoil because of their negative impact on living conditions, these ceilings disrupt the much needed expansion of the health workforce, thus impairing the ability of the health sector to recruit and retain health workers. Overall, this is a matter of paramount importance in low-income developing countries -LIDCs (which also bear the largest number of IMF expenditure conditions on average).
The report makes it clear how, as a Damocles’s sword, the prioritisation of debt service payments has jeopardized health spending in the studied countries while increasing reliance on out-of-pocket payments for health services. Debt service costs as a share of the total budget were higher than health spending in eight of the countries studied.
To make things even worse, Eurodad study shows that IMF is increasingly using ‘hidden’ forms of conditionality at a time when new conditions added during programme reviews bear down on the overall conditionality burden of the recipient country.
What’s more, the study results turn the spotlight on evidence that ‘The social spending floors that are part of IMF programmes, and that are supposed to shield vulnerable groups, are at levels below what is needed to guarantee basic healthcare.’
As such, no wonder that … IMF programmes are overall ineffective in restoring debt sustainability in the long term. The majority of countries in the sample are repeat borrowers: 24 out of 26 countries were involved in another IMF programme in the previous 10 years.
Requirements to reform
Owing to its influence on domestic policies of the borrowing countries, the IMF should focus on helping them explore a wide range of options for dealing with fiscal deficits. These options should ensure the protection and increase in social spending, including on health and education, and the removal of budget ceilings, including on the recruitment and retention of health workers.
A key problem underlying the damage of IMF reform recipe is that negotiation is usually limited to a narrow circle of finance ministries in the absence of public participation or scrutiny. Transparency of negotiation and participation of other relevant ministries and civil societies are essential to ensure pro-human development policies. As said by the authors of Eurodad study, ‘…Real democratic ownership should be more than the mere acceptance of a set of economic reforms by a borrowing government in dire economic circumstances. It should be the result of a process involving stakeholders such as parliaments and civil society organisations.’
Such a process, conducted before approving IMF programmes, should involve a careful assessment of debt burden implications on the fulfillment of human rights obligations.
At the same time, the IMF should avoid attaching conditions to its lending policy other than the repayment of the loan on the terms fixed.