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IMFSurvey Magazine: Policy

IMF Watching Out for Poor in Crisis Loan Talks

Farmers in Pakistan dry fresh dates. The Pakistan program envisages increased social spending (photo: Mohsin Hassan/Reuters)

Terms for IMF loans

IMF Watching Out for Poor in Crisis Loan Talks

By Michaela Schrader
IMF Survey online

November 25, 2008

  • IMF limiting loan conditions to essentials for resolving crisis
  • Trying to ensure that impact of adjustment on poor taken into account
  • Managing Director talks of "social conditionality" in loan programs

In loan negotiations with countries hit by the financial crisis, the IMF is encouraging governments to maintain or develop social safety nets for the poor even as they adjust to the harsher environment of the economic downturn, IMF Managing Director Dominique Strauss-Kahn says.

Speaking in Paris to a meeting of parliamentarians from around the world on November 20, Strauss-Kahn said that the IMF was helping countries affected by the crisis with policy advice and lending to those that needed balance of payments support.

The IMF has recently announced loans to Hungary, Iceland, Pakistan, and Ukraine and is also in talks with several other countries affected by the global crisis.

Streamlined conditionality

In a speech and subsequent question-and-answer session with the group of 170 parliamentarians, Strauss-Kahn said that the IMF was trying to limit the conditions attached to its loans to terms that were essential for resolving the country's immediate economic difficulty.

Often in the past, the IMF had included conditions that were felt desirable for the country's future prospects, but were not necessarily directly related to the achievement of objectives set under the program.

The IMF was also trying to ensure that economic adjustments agreed with governments in response to the crisis would take into account the impact on the poor and most vulnerable.

"The Fund is trying to implement what I call `social conditionality'—helping countries develop or maintain safety nets for segments of the population that may be affected by an IMF program," Strauss-Kahn said. "The IMF intervenes when things aren't going well, so reform measures will inevitably be unpleasant. But we have to make sure that these measures affect as little as possible the poorest and most vulnerable populations."

As part of the $16.4 billion loan package for Ukraine, for example, the government envisages an increase in targeted social spending amounting to 0.8 percent of GDP to shield vulnerable groups.

In the Pakistan program, expenditure on the social safety net will be increased to protect the poor through both cash transfers and targeted electricity subsidies. The fiscal program for 2008/09 envisages an increase in spending on the social safety net of 0.6 percentage points of GDP to 0.9 percent of GDP. Pakistan will also work with the World Bank to prepare a more comprehensive and better targeted social safety net program.

The "other" crisis

While people in advanced economies face a decline in their standard of living or a decrease in purchasing power as a result of the crisis, Strauss-Kahn, a former French finance minister who took over as head of the IMF a year ago, noted the world's poor face the prospect of malnutrition and even starvation. He said it was important to look beyond the current financial crisis to the human costs of the other crisis (food and commodities). He invited parliamentarians to attend a conference on Africa that the IMF is co-sponsoring in Tanzania in March.

Strauss-Kahn was speaking at the annual meeting of the Parliamentary Network on the World Bank that links parliamentarians from 110 countries.

Yunus Carrim, a parliamentarian from South Africa, noted in response to Strauss-Kahn's statement that he expected the impact of the crisis on Africa to be severe in terms of lower inflows of foreign direct investment, a rapid decline of commodity exports because of slowing demand from advanced economies, and a decrease in aid flows. He also noted that parliaments needed to play a bigger role in the discussions on governance reform. "It is important to reform the governance of the IMF and World Bank now to enable them to better serve its members," he said.

Comments on this article should be sent to imfsurvey@imf.org


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