Effects of Strings attached to IMF Loans to Developing Countries

 

By Julius Opuni Asamoah (BSc MBA CA)

The International Monetary Fund (IMF) is an independent international financial organisation founded at the Bretton Woods conference in the United States in 1945. It is a cooperative of 190 member countries, whose objective is to promote world economic stability and growth.  The member countries are the shareholders of the cooperative, providing the capital of the IMF through quota subscriptions. In return, the IMF provides its members with macroeconomic policy advice, financing in times of balance of payments need, and technical assistance and training to improve national economic management. 

The IMF pursues various facets of its mandate in a number of ways. It promotes international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems; facilitates the expansion and balanced growth of international trade, and contributes thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy; promotes exchange stability, maintains orderly exchange arrangements among members, and to avoid competitive exchange depreciation; assists in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade; gives confidence to members by making the general resources of the IMF temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity; and shortens the duration and lessen the degree of disequilibrium in the international balances of payments of members.

This mandate gives the IMF its unique character as an international monetary institution, with broad oversight responsibilities for the orderly functioning and development of the international monetary and financial system. In becoming members of the IMF, countries agree to pursue economic policies that are consistent with the objectives of the IMF. The IMF’s Articles of Agreement confer on it legal authority to oversee compliance by members with this obligation, making the IMF the only organisation that has a mandate to examine on a regular basis the economic circumstances of virtually every country in the world. The IMF provides concessional loans to low-income member countries to help support these countries’ efforts to eradicate poverty. In this venture, the IMF works closely with the World Bank and other development partners. In this area the IMF also plays a critical catalytic role to mobilise external financing and donor support for the countries’ balance of payments and development needs.

The IMF is the central institution in the international monetary system. It serves as a forum for consultation and collaboration by members on international monetary and financial matters, and works with other multilateral institutions to devise international rules that would facilitate the prevention and orderly resolution of international economic problems. Technical assistance and training are provided in the core areas of IMF expertise to help member countries design economic policies and improve economic management capabilities, which in turn can help reduce the risk of policy failures and the countries’ resilience to shocks, and facilitating programme design and implementation. These activities are particularly important in developing countries, where resources are scarce and institutions often weak.

The IMF grants loans to countries that are experiencing economic distress to prevent or mitigate financial crises. The economic policy conditions attached to such IMF loans have become an important vehicle through which orthodox and market-oriented economic policies are carried out, especially in developing countries. The economic policies which are designed and integrated into their loans and grants have been widely criticised by all manners of professionals, academics, civil societies and all other social movements. Critics concur that the conditions required by IMF often undermine national policy autonomy and economic development of the borrower. In fact, the inherent conditionalities of IMF loans to developing countries have failed to create the right incentives for development-oriented policy reforms. 

Economists and finance professionals are always looking forward to the IMF to rise up to the challenge of fundamentally rethinking the monetary and fiscal policies it recommends to developing countries. In other words, will the IMF’s loan policies continue to be an obstacle or conduit for fundamental changes in the economic paradigm which have resulted in recurring financial crises of borrowers? Nowhere in the global economy are the IMF’s influence and the negative anti-developmental impacts of its policy prescriptions are more evident than developing countries. In most of the times, IMF’s induced policies debar related countries from accessing finance from private capital markets, to adjust their balance of payments disequilibria by manoeuvring their exchange rates. In such circumstances, the IMF becomes the only borrower of funds to these developing countries.

Even though the IMF always claims that they are assisting the developing world in terms of development, surviving in economic and financial crisis and in various other ways, their presence are often questioned. They are criticised by practicing bad governance, marginalising the developing world, biased policies, providing hurting and painful technical and financial assistance, protecting interests of the west and so on and so forth. Critics are not only from economic and financial aspects but from far and wide areas. Despite IMF’s attempts to reform the way it does business with developing countries, still the fundamentals have not changed. The key problems associated with implementing a pro-cyclical macroeconomic framework have not changed. Critics argue that IMF’s involvement has overstepped its mandate as an international lender for balance of payment problems. 

Trade liberalisation and privatisation are also serving interests of the developed countries and increased poverty. There is also a strong condemnation from developing countries who see IMF programmes as threat to their economic and political sovereignty. The researches on economic expansion, development, and richness generally agree that the way to economic success is economic autonomy built on a well-built rule of law. Almost all highly industrialised countries such as Japan and United States had developed their economies by intelligently and selectively shielding  some  of  their  industries  up  to  the  point  they  become  tough enough to defend their market share against foreign companies. When it comes to developing countries, whether it is a difficult time that they are struggling with economic crisis, or in their normal conditions. Most of the times experts from IMF and western countries read specific and selective pages of the history of developing countries in economic development platforms, to convince them that the only way to improve economic conditions is through lifting all kinds of trade and capital barriers or opening their markets to the rest of the world. As far as the economic freedom is concerned, conditionality, the conditions that global leading figures oblige to countries to reach standard that it can take loan from IMF, weaken national independence. Loosing economic sovereignty not only gives the West access to loot resources of that country, but it also undermines service delivery of those governments. 

Moreover, the IMF aims to enhance economic growth and stability by providing technical support and financing to member countries with economic difficulties. Using its structure, and membership, the IMF attempts to provide more stability and certainty for the globalised economy. Since globalisation influences the developing economies through trade in goods, flows of capital and migration of people, the IMF is heavily expected to be involved in the development processes of member countries. Given the numerous strong arguments against their efforts elucidated in discourses, their positive contributions seem insignificant.  Although they have operated over half-a-century in developing countries, what the IMF messed up is much, more enormous. Apparently, the structure of this institution, which is western designed and dominated, show that it is not intended to help the developing world, but serve for the West. The developing countries have clear minority in the administration and they are marginalised in power sharing, decision making, designing projects and policies, problem solving and even operating in the field.  Not only the IMF protects the interests of the West, it is also said to be used as imperialism tool. 

Ultimately, it is clear that the mission and vision of the IMF are predetermined, and developing countries have no chance either to alter or to improve. The West sounds like “this is for you, but we know you better than yourself, so don’t question our efforts”. The interest of the donor countries always outweighs the need of the recipient. The reliability of IMF’s reports, and its predictions on economic performances have been under fire. Both investors  and  lending-countries often  use  IMF reports  and  policy  documents  as  foundation of  their  decisions. The fact remains that, on granting of loans to developing countries, the IMF makes the loan conditional on the implementation of certain economic policies. These policies tend to involve reducing government borrowing especially from private borrowing, increasing taxes and lowering spending. Governments of borrowing countries are entreated to allow failing firms to go bankrupt. Structural adjustments like privatisation, deregulation, reducing corruption and bureaucracy are more often encouraged, which are really best practices. However, the problem is that these policies of structural adjustment and macroeconomic intervention can make difficult economic situations worse.

Over time, the IMF has continued to be subjected to a range of criticisms, generally focused on the conditions of its loans and other financial assistance. The IMF has also been criticised for its lack of accountability and willingness to lend to countries with bad economic management and human rights records. The criticisms of IMF's activities in developing countries keep on becoming topical when considering the effectiveness of its loans to the borrowing countries. IMF's modes of operation and inflexibility in negotiations infringe the sovereignty of states and alienate governments from the measures they are supposed to implement; that there is an increasing overlap with other donors; and between them that they are apt to swamp governments with policy conditions. Its credits and programmes are too small, expensive and short-term. The programmes are criticised as too short-term for economies whose balance of payment problems are rooted in structural weaknesses and who often face secular declines in their terms of trade. The credits are also criticised for their short maturity periods and the near-commercial rates of interest which they often bear; and as being too small relative to financing needs.

As well as the IMF is being criticised for implementing free-market reforms, others criticise the IMF for being too interventionist. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention. They argue that attempts to influence exchange rates only make things worse, it is better to allow currencies to reach their market level. 

Furthermore, there is also a criticism that bailing out countries with large debt creates moral hazard. Because of the possibility of getting bailed out, it encourages countries to borrow more. Some practitioners are of the view that the IMF has been criticised for imposing policy with little or no consultation with the affected countries. There is a school of thought that because the IMF deal with the economic crisis, whatever policy they offer, there are likely to be difficulties. It is not possible to deal with a balance of payments without some painful readjustment. In certain instances, the IMF has had some successes but the failures tend to be widely publicised and its successes are less so.

In conclusion, the IMF pays more attention to achieving a better balance between demand-management and supply-side measures, even in its short-term stand-by programmes, which now place greater weight on the goal of economic growth. In many cases, the privatisation or reform of public enterprises is stipulated to reduce budgetary pressures but also to raise productive efficiency. Price and subsidy reforms are also common ingredients, raising petroleum prices or cutting food subsidies. It is believed that through the working of IMF and other activities such as the gathering of statistics and analysis, surveillance of its members' economies, and the demand for particular policies, the IMF works to improve the economies of its member countries. The IMF typically analyses the appropriateness of each member country's economic and financial policies for achieving orderly economic growth, and assesses the consequences of these policies for other countries and for the global economy. However, the IMF loans weaken the economic freedom and sovereignty of the recipient countries by imposing policies against their willingness. Transparency is another significant issue. The IMF is too obscured and have little to open to the world in terms of documents and information. The lack of transparency in decision-making, nonetheless draws more attention. The fact still remains that the IMF’s lending operations are characterised by weak cost-benefit analysis and monetary and evaluation procedures. We can all agree at least that there is no country in this world, achieved economic development with the help of aid. It is argued that the IMF serves the interests of the West, and their policies often hurt the developing countries and hinder their development in general. It is therefore time for developing countries to consider more beneficial alternatives than to consider the IMF as the lender of last resort.