The IMF’s mandate is to oversee the international monetary system and monitor economic and financial developments in and the policies of its 189 member countries. It helps member countries implement sound and appropriate policies by strengthening their capacity to design and implement sound economic policies. If a member country faces a balance of payment crisis, the IMF provide financial assistance but imposes certain conditionalities to correct underlying macroeconomic problems and thus restore confidence, stability, and growth. While the member countries welcome the financial package, they invariably resent these conditionalities for one reason or other.
This article explains those conditionalities, the reasons why the IMF imposes them, and the reasons why the countries resent them.
Introduced in 1952, IMF conditionality is a set of policies or conditions that the IMF requires in exchange for providing financial resources to a country facing a severe balance of payments or the budgetary deficit. These conditionalities which are in addition to the collateral from countries for extending them short to medium term loans require the government seeking assistance to correct its macroeconomic imbalances in the form of policy reform.
What is IMF Conditionalities?
Used as an enforcement mechanism, some of the conditions for structural adjustment can include:
- Austerity: Cutting unproductive government expenditures, balancing budgets
- Resource Mobilisation: Increasing resource extraction through increased taxation and reforming revenue collection mechanism
- Currency Rationalisation: Devaluation/depreciation of currencies to bring them to their true market worth
- Trade liberalisation: Lifting import and export restrictions,
- Opening the economy: to foreign investment and facilitating FDI/opening of domestic stock markets),
- Deregulation of the economy: removing price controls and state subsidies,
- Privatization: divestiture of all or part of state-owned enterprises,
- Governance Reforms: Improving governance and fighting corruption.
These conditions are known as the Washington Consensus.
How does the IMF help?
The IMF helps countries implement sound and appropriate policies through its FOUR key functions of surveillance, consultation, technical assistance, and lending- SCTL.
The IMF’s mandate is to oversee the international monetary system and monitor economic and financial developments in and the policies of its 189 member countries. Every country that joins the IMF accepts the obligation to subject its economic and financial policies to the scrutiny of the international community. This process, known as surveillance, takes place at the global level and in individual countries and regions. The IMF assesses whether domestic policies promote countries’ stability by examining risks they might pose to domestic and balance of payments stability and advises on needed policy adjustments. It also proposes alternatives when countries’ policies promote domestic stability but could adversely affect global stability.
The IMF also closely monitors global and regional trends, analyses global and regional macroeconomic and financial developments, and advances a shared understanding of policies needed to promote stability. The Fund has introduced several reforms to improve financial sector surveillance within member countries and across borders, to enhance understanding of inter-linkages between macroeconomic and financial developments, and stimulate debate on these matters. The IMF has also strengthened its analysis of macro-critical structural reforms to the macroeconomy to help countries promote durable and inclusive growth.
The IMF monitors members’ economies through regular—usually annual—consultations with each member country. During these consultations, IMF staff discusses economic and financial developments and policies with national policy makers, and often with representatives of the private sector, labour and trade unions, academia, and civil society. The staff assesses risks and vulnerabilities, and considers the impact of fiscal, monetary, financial, and exchange rate policies on the member’s domestic and balance of payments stability, and assesses implications for global stability. The IMF offers advice on policies to promote each country’s macroeconomic, financial, and balance of payments stability, drawing on experience from across its membership.
The IMF helps countries strengthen their capacity to design and implement sound economic policies. It provides advice and training in areas of core expertise—including fiscal, monetary, and exchange rate policies; the regulation and supervision of financial systems; statistics; and legal frameworks.
Even the best economic policies cannot completely eradicate instability or avert crises. If a member country faces a balance of payment crisis, the IMF can provide financial assistance to support policy programs that will correct underlying macroeconomic problems, limit the disruption to both the domestic and the global economy, and help restore confidence, stability, and growth. The IMF also offers precautionary credit lines for countries with sound economic fundamentals for crisis prevention.
Rationale of Conditionalities
IMF supporters claim it is a necessary lender of last resort for areas in crisis and it can impose necessary or difficult reforms on backward economies. Critics counter the IMF supersedes national autonomy, exacerbates economic problems more often than not, and serves as a tool for the wealthiest nations only.
These loan conditions ensure that the borrowing country will be able to repay the IMF and that the country will not attempt to solve their balance-of-payment problems in a way that would negatively impact the international economy.
The incentive problem of moral hazard—when economic agents maximise their utility to the detriment of others because they do not bear the full consequences of their actions—is mitigated through conditions rather than providing collateral; countries in need of IMF loans do not generally possess internationally valuable collateral anyway.
Conditionality also reassures the IMF that the funds lent to them will be used for the purposes defined by the Articles of Agreement and provides safeguards that the country will be able to rectify its macroeconomic and structural imbalances.
In the judgement of the IMF, the adoption by the member of certain corrective measures or policies will allow it to repay the IMF, thereby ensuring that the resources will be available to support other members.
Have they worked
So far, the results have been mixed; some borrowing countries have had a very good track record for repaying credit extended under the IMF’s regular lending facilities with full interest over the duration of the loan. This indicates that IMF lending does not impose a burden on creditor countries, as lending countries receive market-rate interest on most of their quota subscription, plus any of their own-currency subscriptions that are loaned out by the IMF, plus all of the reserve assets that they provide the IMF.
However, there are a large number of scholars and practitioners who have serious reservations about the IMF programmes. Some of the common criticisms are as follows
International politics play an important role in IMF decision-making. Developed countries were seen to have a more dominant role and control over less developed countries (LDCs). The clout of member states is roughly proportional to its contribution to IMF finances. The United States has the greatest number of votes and therefore wields the most influence. Domestic politics often come into play, with politicians in developing countries using conditionality to gain leverage over the opposition to influence policy.
Another criticism is that IMF programs are only designed to address poor governance, excessive government spending, excessive government intervention in markets, and too much state ownership. This assumes that this narrow range of issues represents the only possible problems; everything is standardised and differing contexts are ignored. A country may also be compelled to accept conditions it would not normally accept had they not been in a financial crisis in need of assistance.
The Fund worked on the incorrect assumption that all payments dis-equilibria were caused by domestically. IMF did not distinguish sufficiently between dis-equilibria with predominantly external as opposed to internal causes. This criticism was voiced in the aftermath of the 1973 oil crisis. Then LDCs found themselves with payments deficits due to adverse changes in their terms of trade, with the Fund prescribing stabilisation programmes similar to those suggested for deficits caused by government over-spending. Faced with long-term, externally generated disequilibria, the G-24 argued for more time for LDCs to adjust their economies.
Some IMF policies may be anti-developmental; the report said that deflationary effects of IMF programmes quickly led to losses of output and employment in economies where incomes were low and unemployment was high. Moreover, the burden of deflation is disproportionately borne by the poor.IMF policies in Africa undermine any possibility of meeting the Millennium Development Goals (MDGs) due to imposed restrictions that prevent spending on important sectors, such as education and health.
One Size Fits All Approach
The IMF’s policies, based in theory and influenced by differing opinions and departmental rivalries, are “out of touch” with local economic conditions, cultures, and environments in the countries they are requiring policy reform. Critics suggest that its intentions to implement these policies in countries with widely varying economic circumstances were misinformed and lacked economic rationale. IMF was insensitive to the political aspirations of LDCs, while its policy conditions were inflexible.ODI concluded that the IMF’s very nature of promoting market-oriented approaches attracted unavoidable criticism.
One view is that conditionality undermines domestic political institutions. The recipient governments are sacrificing policy autonomy in exchange for funds, which can lead to public resentment of the local leadership for accepting and enforcing the IMF conditions. IMF conditions are often criticised for reducing government services, thus increasing unemployment and increasing inflation-lethal combination for political instability. Political instability can result from more leadership turnover as political leaders are replaced in electoral backlashes.
Creates Moral Hazard
Some member nations, such as Italy and Greece, have been accused of pursuing unsustainable budgets because they believed the world community, led by the IMF, would come to their rescue. This is no different from the moral hazard created by government bailouts of major banks. American economist William Easterly, sceptical of the IMF’s methods, had initially warned that “debt relief would simply encourage more reckless borrowing by crooked governments unless it was accompanied by reforms to speed up economic growth and improve governance,” according to The Economist.
It is claimed that conditionalities retard social stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient countries. The IMF sometimes advocates “austerity programmes”, cutting public spending and increasing taxes even when the economy is weak, to bring budgets closer to a balance, thus reducing budget deficits. On top of that, regardless of what methodologies and data sets are used, it comes to the same conclusion- countries with IMF programs face increased income inequality. Countries are often advised to lower their corporate tax rate, which further accentuates the income disparity.
The researchers Eric Toussaint and Damien Millet argue that the IMF’s policies amount to a new form of colonization that does not need a military presence. The IMF and its ultra-liberal experts took control of the borrowing countries’ economic policies. A new form of colonization was thus instituted. It was not even necessary to establish an administrative or military presence; the debt alone maintained this new form of submission.” Former Tanzanian President Julius Nyerere, who claimed that debt-ridden African states were ceding sovereignty to the
IMF and the World Bank, famously asked, “Who elected the IMF to be the ministry of finance for every country in the world?
Argentina-IMF as a Saviour or a Scapegoat?
Blaming the IMF for all the mess of a country has become fashionable. Take the case of Argentina which had been considered by the IMF to be a model country in its compliance to policy proposals by the WB/IMF. It experienced a catastrophic economic crisis in 2001, which some believe to have been caused by IMF-induced budget restrictions—which undercut the government’s ability to sustain national infrastructure even in crucial areas such as health, education, and security—and privatisation of strategically vital national resources.
Others attribute the crisis to Argentina’s mis-designed fiscal federalism, whereby the federating units got substantial resources from the federal kitty. While the federal government did not reduce its spending despite fewer resources at its disposal after devolution, the provinces increased their spending because of the additional funds made available. Consequently, Argentina started facing the worst type of fiscal deficit and ballooning debt trap
Whatever the reason, the crisis added to widespread hatred of this institution in Argentina and other South American countries, with many blaming the IMF for the region’s economic problems. The current trend toward moderate left-wing governments in the region and a growing concern with the development of a regional economic policy largely independent of big business pressures has been ascribed to this crisis.
From the e-book “International Relations; Basic Concepts & Global Issues- A Handbook”, published by Amazon and available at https://www.amazon.com/dp/B08QZSRWT1