IMF needs better understanding

The Third World faces a debt crisis

Apart from a couple of months during the heyday of the pandemic, in its programme with Pakistan, the International Monetary Fund (IMF) has continued to push austerity-based, procyclical policy conditionalities. It is not to say that a number of ‘Chicago boys’-styled policymakers in the country over the years, and up till now, have not also pushed for the same neoliberal, austerity, procyclical policies.

In both the local and international context, in terms of overall stagflationary consequences of such policies, it is indeed important that IMF revisits– and also local policymakers with similar mindset revisit their policy stance, and shift towards non-neoliberal, non-austerity, counter-cyclical policies.

Such a revisit is indeed long overdue, and especially since the Global Financial Crisis of 2007-2008. Moreover, given the fast unfolding of the existential threat of climate change crisis, monetary and fiscal austerity policies have not allowed moving towards much-needed resilient economies. Hence, on one hand climate finance has been hard to come by, since rich countries have not met their commitments on providing climate finance, and on the other, the policy bent overall towards neoliberal, austerity, and procyclical policies, has increased the cost of capital, and in turn, increased debt repayments, curtailed fiscal space, and negatively affected climate investments, and overall development expenditure.

For countries highly vulnerable to climate change, including Pakistan, which are also faced with a seriously difficult debt burden, lack of provision of climate finance has meant that their resilience against climate disasters remains weak. With regard to the lack of climate finance provided by rich countries, a recent Al Jazeera published article ‘Rich nations urged to pay $13 trillion in pledges to Global South’ pointed out ‘Rich G7 nations owe poor ones an estimated $13 trillion in unpaid development aid as well as support in the fight against climate change, British charity Oxfam says. Instead of fulfilling their obligations, the International Group of Seven nations and their banks are demanding debt repayments of $232 million per day, the organisation said on Wednesday. …Developed countries promised in 2009 to transfer $100 billion annually between 2020 and 2025 to vulnerable states hit by increasingly severe climate-linked impacts and disasters– but that target was never met. The G7 leaders are expected to reaffirm their climate goals during a summit in Hiroshima, Japan, from May 19-21. Developing countries say they need far more support from rich nations– responsible for most greenhouse gas emissions– otherwise they cannot afford to cut CO2 emissions...’

Here, in line with the suggestions of the Prime Minister of Barbados, Mia Mottley, for instance, in the ‘Bridgetown Initiative’ that she has led, in which she has called for yearly issuance of climate-changerelated special drawing rights (SDRS) to countries highly vulnerable to climate change, indeed, needs to be adhered to by IMF. Already, climate related disasters have significantly disrupted macroeconomic stability, and economic growth in many countries. Last years’ catastrophic floods in Pakistan, resulted in billions of dollars of damage to the country’s economy, and the wheat crop was also seriously damaged. It is therefore important, that both the IMF and rich countries provide appropriate levels of climate finance.

The IMF also needs to improve the allocation formula for allocation of SDRS, since the one it did back in August 2021 followed the routine quotabased sharing formula, whereby most of the $650 billion allocation went to already rich countries. This formula needs to shift towards a needs basis, and not how much a country contributes to the overall pool of resources of the IMF.

A recently published article ‘UN Secretary General says moral problem exists in int’l financial system’ highlighted the UN Secretary General’s comments with regard to the global financial system as ‘The United Nations Secretary General, Antonio Guterres on Monday called for an end to a “moral” problem which he used to describe the “injustice” in the existing world economic order. “We are, today, facing when we look at the present international financial architecture, a moral problem, a power problem and a practical problem,” Guterres, who held talks with Prime Minister Andrew Holness, told a news conference. … He said adequate care was not taken and that led to increases in inflation. Developing countries are now feeling the brunt of their policies. “Then, because there was a huge global liquidity problem, the IMF was able to issue special drawing rights (SDR),” he said, noting that some countries like Europe received US$180 billion, while African countries, three times the population of Europe, received US$34 billion.’

Here, it also needs to be pointed out that IMF needs to immediately undo its wrong ‘surcharge policy’ on account of delayed repayments on loans by programme countries, especially since the onslaught of pandemic, and in its wake overall high inflation, and acute debt distress being faced by many countries, and which requires greater fiscal space for making greater investments on the supply-side– given a significant supply-side nature of inflation– and higher level of development expenditures, especially in the public health sector, especially given the high probability of more pandemics to happen, since they are strongly related to climate change crisis.

Nobel laureate in economics, Joseph E. Stiglitz, in an article ‘Understanding the consequences of IMF surcharges: the need for reform’ published in July 2022, and that he co-authored with noted economist Kevin P. Gallagher, pointed out negative consequences of the surcharge policy as ‘What might be the justifications for these regressive transfers? The oft-cited rationale is to limit the demand for IMF programmes, to offset the risk of non-repayment and to encourage borrowers to pay back ahead of schedule. Of course, it is important for member countries not to become over-reliant on the IMF for liquidity, but regressive and pro-cyclical surcharges are not the most efficient way to create such incentives amid a global economic crisis. The unintended consequences are twofold. First, the surcharges disproportionately affect middle-income countries with lower quotas that, by definition, need both extensive IMF financing to repay and longer repayment periods to recover from crises. Second, they require borrowing members to pay more at exactly the moment when they are most squeezed from market access in any other form.’

Here, it also needs to be pointed out that IMF needs to immediately undo its wrong Âsurcharge policyê on account of delayed repayments on loans by programme countries, especially since the onslaught of pandemic, and in its wake overall high inflation

The writer holds PHD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund.prior to this, he did MSC. in Economics from the University of York (United Kingdom), and worked at the Ministry of Economic Affairs & Statistics (Pakistan), among other places. He is author of Springer published book (2016) ‘The economic impact of International Monetary Fund programmes: institutional quality, macroeconomic stabilization and economic growth’.he tweets @omerjaved7