THE IMF POLICY CONDITIONS

THE scope of IMF policy conditions has been increasing through the years and has become far too broad.

Many of the conditions were not relevant or critical to the causes or the management of the crisis the countries found themselves in.

Some of these conditions were put into the conditionality package under the influence or pressure of major IMF shareholders for their own interest or agenda, rather than in the interests of the debtor country.

On many areas where conditions are set, neither the IMF nor the World Bank has the expertise to give proper advice, and thus the potential to commit a blunder is high and the negative effects can also be high.

This includes the area of political conditionality and issues relating to “governance.” In many countries, import liberalisation has led to domestic firms and industries having to close down as they were unable to compete with cheaper imports, and de-industrialisation has been the result.

There is now strong emerging evidence that trade liberalisation can successfully work only under certain conditions. Factors for success or otherwise include the ability of the country’s enterprises and farms to withstand import competition, its production and distribution capacity to export, as well as the state of commodity prices and the degree of market access for its products.

In the absence of positive factors, import liberalisation may cause the country into deeper problems.

The implications for conditionality are significant. Evidence is emerging that wrongly sequenced and improperly implemented trade liberalisation is adding to developing countries’ trade deficits.

The IMF should thus review its trade liberalisation conditionality to take account of the need to enable countries to tailor their trade policy to their particular conditions and their development needs.

In areas of its core competence, there are also serious problems with IMF policies. The problems with conditionality do not lie only in “new areas” outside the traditional areas of the IMF’s concern.

The criticism is now widespread that even in the areas of the IMF’s core competence (macroeconomic, financial, monetary and fiscal policies), there are major problems of appropriateness of policy and conditionality.

Policy objectives, assumptions and policy instruments on how to obtain them are under question, given the poor record of outcome.

This questioning of the appropriateness and outcomes of policy had already been going on for several years (especially in relation to policies and results in Africa), but the doubts and criticisms grew much more intense as a result of the IMF handling of the Asian crisis.

Since the type of policies that are linked to IMF conditionality have been increasingly criticised for not working, including because they are contractionary and recessionary in nature and effect, it is no wonder that there is a lack of credibility and confidence in the substance of IMF conditionality, even in its core areas of competence.

There is thus a need for IMF to review its macroeconomic package, re-look the policy objectives and assumptions, compare the trade-offs in policy objectives with the number and effects of policy instruments, and widen the range of policy options and instruments.

This review should be made in respect of government budget and expenditure, money supply, interest rate, exchange rate, and the degree of capital account openers and regulation.

The IMF has also been heavily criticised, especially by civil society, for the inappropriate design of their policies from the viewpoint of social impact, including reducing access of the public to basic services, and increasing the incidence of poverty.

The adverse social impacts are caused by several policies and mechanisms. The contractionary monetary and fiscal policies induce recessionary pressures, corporate closures, lower or negative growth rates, retrenchments and higher unemployment.

Cutbacks in government expenditure lead to reduced spending on education, health and other services. The switch in financing and provision of services from a grant basis to user-pay basis impacts negatively on the poorer sections of society.

The removal or reduction of government subsidies jacks up the cost of living including the cost of transport, food, and fuel.

These and other policies have contributed to higher poverty, unemployment, income loss and reduced access to essential goods and services. It is not a coincidence that countries undergoing IMF conditionality have been affected by demonstrations and riots (popularly called “IMF Riots”).

The social impact of IMF policies is another major cause of the crisis of credibility in IMF conditionality. It must be recognised by the IMF that the major problem with its conditionality is that the policies associated with it are seen to be inappropriate and harmful.

This view is not confined to critical academics or NGOs but is now adopted by renowned mainstream scholars, by parliamentarians of many countries, and also by policymakers of the countries taking IMF loans and undergoing IMF conditionality.