IMF Programs: Myths and Misconceptions, a commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund
September 24, 2012
A commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund
Published in Akhbar el-Yom, Al-Sharq al-awsat, Al-Ghad, and Dawla; September 2012
Over the past few months, Jordan, Morocco, and Yemen have turned to the IMF for financial support to back their economic reform programs. Egypt is starting talks on a loan that would back its economic stabilization and growth agenda.
Governments and financial markets see this IMF deepening engagement as a vote of confidence in these economies and a much-needed financial cushion. Public reaction is mixed. Some commentators question whether the money will be well spent or just add to national debt. Others worry about the conditions attached to the loans and whether they will mean hardship for the ordinary people.
Such concerns stem from a legitimate desire to ensure that national interests drive national economic policies and that they improve peoples’ lives. They also show that we at the IMF need to do a better job of explaining why and how the IMF’s support can help ease the process of dealing with economic shocks and how the IMF itself has changed over time. In this article, I want to deal with five common misconceptions about the IMF.
1- IMF programs impose unnecessary austerity and hardship: Countries generally turn to the IMF for financing when they have run into economic difficulties. These difficulties may come about because of an external shock—for example, a sharp increase in the price of energy or other key imports, or because domestic economic policies have led to growing economic imbalances and vulnerabilities—for example, unsustainable budget deficits have been financed through printing national currency, which has led to a sharp decline in foreign exchange reserves.
Dealing with these shocks and imbalances generally entails painful decisions by the governments: a cut-back in government spending, an increase in interest rates, or an increase in the price of scarce foreign exchange. The role of IMF financing is to help countries ease the pain of this adjustment by providing a cushion of support and more time to address the underlying problem.
In the absence of IMF financing, the adjustment process would be more difficult. For example, if investors do not want to buy any more of a country’s government bonds, its government has no choice but to reduce the amount of financing it uses—by cutting its spending or increasing its revenues—or to finance its deficit by printing money. The “belt tightening” involved in the first case would be greater without an IMF loan. And, in the second case, the result would be inflation, which hurts the poor most of all. IMF financing can facilitate a more gradual and carefully considered adjustment.
The period of adjustment is still associated with a time of austerity in many minds. And this leads some people to associate the IMF with imposing unnecessary hardship, even though it is a bit like blaming the firefighter for putting out the fire!
Having said that, what the IMF can also do is to bring to bear the experience of its 188 member countries in embarking on macroeconomic adjustment in a way that protects the poor and vulnerable. For example, minimum spending targets on social and other priority outlays have been incorporated into programs for many low-income countries. A recent study covering 140 countries over 1985–2009 found that IMF-supported programs often have a positive and significant impact on social spending, particularly health and education.
2. The IMF imposes conditions that are not appropriate for the country: One key lesson of development is that one size does not fit all! Every country must find its own path to dealing with economic and social challenges, even if there are important lessons from experience of other countries on which policies generally work well to achieve a given objective. This basic truth is also reflected in the design of IMF-supported programs, which are increasingly flexible and accommodate countries’ individual circumstances and social conditions. One concrete reflection of this is a reduction in the number of parameters associated with IMF-supported programs from an average of nine in 2001–04 to six in 2008–09. Also, the number of programs with 15 or more conditions per review dropped to zero during 2008–09.
Another important point is that programs that are home grown and have the full ownership of country authorities are most likely to be effectively implemented. Imposing policies from outside is generally unsuccessful. So, the IMF insists that programs it supports should be developed by the country authorities and, as much as possible, shared publicly by them in the country to gain broad support. We also publish our staff’s reports on these programs immediately after the programs have been approved by the Executive Board. These reports can be found on the IMF website www.imf.org.
3. IMF financing enables governments to keep unsustainable policies: The IMF will not make financing available if a government’s economic policies are going down the wrong path. Most IMF loans are disbursed in installments that are linked to specific policy actions. The aim behind this is to ensure that progress is being made in program implementation—and to reduce risks to the IMF—that is, to the pool of resources that are made available to the IMF by its member countries.
Regular program reviews provide a framework for the IMF’s Executive Board to periodically assess whether the IMF-supported program is on track and whether modifications are necessary for achieving the program’s objectives. Reviews combine a backward-looking assessment (were the program objectives met according to the agreed timetable?) with a forward-looking perspective (does the program need to be modified in light of new developments?). Disbursements under an IMF-supported program can take place only upon approval—that is, the completion of reviews—by the IMF Executive Board.
4. The IMF has not learned the lessons of the Arab Spring: One of the key lessons from the Arab Spring is that for economic growth to be sustainable, it must create jobs, its benefits should be widely spread, and there should be a broader and fairer distribution of economic opportunities across the population. In response, IMF-supported programs have become more focused on promoting growth in a way that benefits the whole population, and on reducing poverty and unemployment, especially among the younger generation.
For example, we urge governments to make room for priority spending, such as on investment in infrastructure, education, and health, by controlling wasteful and untargeted spending. One way to do that is to replace generalized subsidies with more targeted social safety nets. Generalized subsidies tend not to help poor—in fact, we have found that across MENA, only 20 percent of food and fuel subsidies reach the poor, while the remaining 80 percent benefit those who are not needy.
5. IMF loans simply add to national indebtedness: It is of course technically true that all loans—including IMF loans—add to the debt given that they will need to be repaid. However, the more interesting question is whether a loan is used in a way that improves the conditions in countries and enables them to make economic gains even after repaying the loan.
IMF loans help countries cope with immediate liquidity problems—for example, when they are cut off from financial markets, or only have access at penalty rates. This IMF cash literally helps them avoid a much larger and more harmful economic adjustment. Moreover, borrowing from the IMF makes a lot of financial sense. The current interest rate on IMF lending is only about 1.5 percent, significantly lower than what governments typically pay when borrowing from domestic financial markets. Continuous domestic borrowing at such penalty rates could indeed contribute to national indebtedness more drastically. In addition, IMF loans—as a form of foreign borrowing—bring the added advantage that domestic banks will have more room to lend to the private sector, especially to small and medium-sized enterprises, which is key for creating jobs and promoting inclusive growth.