Eurodad, 27 April 2009
Finance ministers from around the world met in Washington at the Spring Meetings of the World Bank and the International Monetary Fund this weekend with the promise to pin down the details of the G20 agreements made in London on 2 April. From the point of view of the millions of people in low-income countries suffering from inequitable economic policies compounded by the effects of the current crisis the meetings in the last two days made very little positive progress. The small clarifications on gold sales, Special Drawing Rights and other issues indicate that there is very little or no concessional, low condition money available and considerable policy and procedural obstacles to getting what little there is.
At the beginning of the month the leaders of the twenty biggest world economies agreed to make available more than $1 trillion to help countries meet their immediate financial needs arising from the crisis and to boost economic activity worldwide. The IMF was the definitive winner of the London April 2 G20 deal, with the promise to quadruple its resources – from $250 billion up to $1 trillion. The meeting of the finance ministers in Washington was expected to clarify how and how much of this money would help poorer countries counter the effects of the crisis, and how International Financial Institutions would be reformed. Despite the urgency of the moment and the promise for resolute action, Finance Ministers managed to do little more than restate the London commitments. Impoverished countries don’t know yet on how much they will count and the extent to which the IMF will grant this finance at reasonable terms and avoid making past mistakes.
No clarity on funding for poorer countries
Initial calculations by Eurodad earlier this month suggested that only $24 billion, a mere fortieth of the $1 trillion promised in London, was earmarked for low-income countries. African and other leaders, plus civil society groups, have been calling for increased grant or highly concessional resources for low-income countries. Using proceeds from IMF gold sales is one option agreed in principle by the G20. Another that found its way into the G20 communiqué was increasing the concessionality of Fund resources for low-income countries by issuing Special Drawing Rights (which have a non-concessional interest rate attached).
The IMFC Communiqué of 25 April 2009 simply restates the intention to “double the Fund’s concessional lending capacity for low-income countries, while ensuring debt sustainability, and exploring scope for increased concessionality.” This actually means that low-income countries will be able to access only some $4 billion extra IMF resources at below market interest rates. To obtain more poor countries would have to borrow at market interest rates, which are presently very low, but may rise in the near future and trap them into new spirals of unsustainable debt.
However even if low-income countries want to obtain this money to stimulate their economies they may not be able to. Their borrowing is limited by thresholds of what the Bank and the Fund consider to be sustainable debt levels (calculated using the controversial Bank/Fund Debt Sustainability Framework). And the latest Fund programmes for low-income countries that Eurodad has analysed prohibit poor countries from borrowing at market interest rates. Therefore the $19 billion for low income countries from the SDR increase is more of a mirage than a real funding option. The Fund is also being silent on the possibility of providing grants to low income countries.
Europeans block progressive deal on IMF gold sales
Civil society organisations are calling to use a greater share of the gold sales proceeds to fund poor countries’ needs. In 2007 the IMF decided to sell a tiny share of its huge gold reserves to meet their administrative costs, which were not met by the Fund’s low lending activity at the time. Due to the increase in the gold price, this plan will generate much more resources than expected in 2007. The G20 has now recommended that up to US$1 billion of these unforeseen additional profits be used to support the poorest countries in the face of the financial and economic crisis. Some CSOs suggest that the full additional profit from the gold sales – US$5.2 billion – should be used to help the poorest countries weather the financial storm and fight poverty.
The IMF Executive Board had a heated discussion on this issue last week, where some European countries – including Belgium and the Nordic constituency – expressed strong objections to using a sizeable share of proceeds from the gold sales for poor countries. Arguments range from the need to “protect the Fund’s capital base”, to the “unfairness of using gold sales for poor countries when emerging economies are paying higher market interest rates to meet Fund’s operational needs that will be not covered if more gold sales proceeds are channelled to low income countries”, according to the Nordic Baltic constituency. However, preliminary CSO calculations show that channelling US$5.2 billion generated from gold sales to the poorest countries will not have any impact on the plan to use part of the proceeds from gold sales for the Fund’s new income model to cover its administrative and operating costs.
Unfortunately, due to the strong split in the Executive Board, the IMFC Communique only mentions that IMF “subsidies (for low income countries) could be financed through a combination of bilateral contributions—possibly by new donors—and the Fund’s resources and income, including the use of additional resources from agreed gold sales.” The Board asked the Fund’s management last week to draft a second paper to spell out the options available in an attempt to take a decision which is being painfully delayed.
Size matters: how expansionary the Fund can be?
But cheap lending – or even grants – is only half of the picture. Conditions attached to these loans will also determine the extent to which this lending will do any good to low income countries. The IMFC Communiqué echoes recent changes in IMF conditionality, including the creation of the new Flexible Credit Line (FCL), which provides precautionary finance for higher middle income countries such as Mexico which the Fund considers to have strong macroeconomic performance. The Communiqué also calls “on the IMF to ensure the successful and evenhanded implementation of this new lending and conditionality framework, and ask the Managing Director to report on progress at our next meeting.”
Although the FCL is an improvement from past Fund’s facilities for its lighter conditionality framework, this facility is only available for a very reduced group of countries. This concern is echoed in the G24 Communiqué. This developing country grouping “encouraged the IMF to apply in its LIC lending the same flexibility and streamlined and review-based conditionality, as agreed for other lending facilities.” According to a senior developing country official “the Flexible Credit Line has opened Pandora’s box. There is no way other developing countries are going to agree that only a few benefit from lighter conditionality frameworks. Probably this is the beginning of better times for streamlining IMF’s conditionality.”
Yet the Fund still has a long way to go to allow generous expansionary fiscal and monetary policies in its programmes. Recent speeches by IMF Managing Director Strauss-Kahn, and the IMFC Communiqué call to “maintain expansionary monetary policies (and)… deliver the scale of sustained fiscal effort necessary to restore growth’. However, a Eurodad discussion paper circulated in Washington – and reports by Third World Network (TWN) and Center for Economic Policy Research – show that IMF programmes still do not include resolute countercyclical policies. Eurodad co-organised a workshop in Washington with TWN, Oxfam and ActionAid to discuss the extent to which the IMF was changing its stance in the context of the crisis. Despite claims to have flexibilised fiscal and monetary targets in its programmes for poor countries, the IMF’s baseline is so stringent that current programme targets are still far from the types of countercyclical policies that rich countries are implementing. Even if the Fund claims to have clear instructions to consistently advice expansionary policies to all countries without exception the reality is that changing deep-rooted policy convictions is rarely achieved overnight in large institutions unless strong guidelines are adopted and closely monitored by the Board of Governors.
Europeans also an obstacle on IMF governance reform
Not much has happened either on governance reform. The Communiqué merely records the need to “complete the quota reform by 2011 … (which will result in) increases in the quota shares of dynamic economies.” Once again the poorest countries are left out from the deal. On this issue, the growing split between low income countries and emerging economies – particularly those that have been accepted into the selective Group of Twenty – is increasingly apparent. Middle income countries which feel that they have a change to be included in the circles that matter when it comes to global economic and financial governance are less and less interested in uniting with the world poorest in a common front.
European governments also played a less than helpful role on this issue. Public comments and proposals were raised by governments from other regions. Brazilian Finance Minister Guido Mantega said, for example: “the IMF repented from many of its past sins. But it still has to address the original sin: its democratic deficit.” US Treasury Secretary Timothy Geithner called for emerging nations to be given more voting shares in the IMF. He also suggested slimming the the Fund’s 24-member board to 22 representatives by 2010 and just 20 by 2012, while maintaining the number of seats for developing countries, thereby strengthening their position. However Belgian Finance Minister Didier Reynders, whose small government has as many votes on the Fund’s board as China and fields a representative there, told Reuters that he supports the status quo: “I think for the moment the representation around the table is attractive. The European countries are having to finance the Fund very strongly”.
The way forward
The lack of progress at the Spring Meetings leaves a lot of homework to be done in the next few weeks. The Fund will struggle to get a deal on gold sales and pin down the details for the SDR increase. It will rush to complete before the Annual Meetings the reform of its low-income country facilities and the flexibilisation of the Debt Sustainability Framework. It will also have to speed up work on voice and quota reform. These piecemeal internal reforms might deliver significant change if coalitions are built to push much further than most IMF staff want.
Despite the recent headlines about a $1 trillion deal for the Fund, the general sense Eurodad staff and members picked up in Washington was not that supportive of a long term role for the Fund. CSOs have for a long time advocated that the Fund should fully withdraw from, or seriously limit, its role in low income countries. However, according to the former Turkish Finance Minister Kemal Dervis now researcher at the Brookings Institution, rich countries have only turned to the Fund now because it was the only institution available. This does not indicate a desire to perpetuate a prominent role for the Fund once the crisis is over. Seriously limiting the role of the Fund to macroeconomic surveillance; creating a panel to monitor its performance; and increasing its linkages to the UN system were some of the proposals put forward by Dervis in a seminar organised by the Frederich Ebert Foundation. UN DESA Under-Secretary General Jomo Sundaram went further, suggesting a World Central Bank to eventually phase-out the need for an IMF.
The June 2009 UN conference on the impacts of the financial crisis in low income countries will give an indication of the extent to which rich and emerging countries have an appetite to re-balance power between the UN and the IFIs. So far the lack of progress to detail the IMF reforms in a progressive direction, as well as the dramatic lack of interest in the UN conference seems to show that we will not get the necessary shake up of global economic and governance institutions.