By Kalima Nkonde
The International Monetary Fund (IMF) was meant for any member country, whether rich, middle-income, or poor, to turn to for financing if it has a balance of payments need—that is, if it cannot find sufficient financing on affordable terms in the capital markets to make its international payments and maintain a safe level of reserves.
IMF loans are meant to help member countries tackle balance of payments problems, stabilize their economies, and restore sustainable economic growth. This crisis resolution role is at the core of IMF lending. About four out of five member countries have used the IMF credit at least once.
Zambia’s economy has been in a crisis for close to two years and that is why the IMF has been called in to help, late as it may be. Finance Minister Felix Mutati has brought in a breath of fresh air by admitting what this writer and others have all along being saying about the causes of the poor economy and what drastic action needed to be taken.
“The IMF is here this week on monitoring mission to discuss the economic situation. We expect them to return for programme discussions later……before any programme details are agreed upon, Cabinet and other economic stakeholders will be consulted,” the Minister announced in an address to Parliament.
As the government prepares for the consultative process as announced by the Finance Minister in Parliament on October 19, 2016, it is important to educate the members of public and our politicians about what the IMF was in the 1980s and 1990s and what it is now. It is hoped that Zambians can debate the IMF programme objectively and from an informed perceptive rather than just talking about the structural adjustment programme (SAP) of the 1980s which the IMF has since abandoned.
It is a well known fact that the International Monetary Fund’s brand was greatly damaged in the 1980s and 1990s among third world countries, some economic experts and Non government organisations. The design and implementation of IMF programs at that time were insensitive to individual countries’ situations. This resulted in IMF programs being associated with death, poverty and human rights violations with regard to the right to decent jobs, education, health care and housing.
In their study, Abouharb and Cingranelli’s concluded that: “based on an analysis of outcomes in 131 developing countries for the period 1981–2003, we show that, on average, structural adjustment has led to less respect for economic and social rights, and worker rights.” Compliance with IMF reforms caused governments to decrease respect and protections for basic human rights, such as the rights to decent jobs, education, health care, and housing.
The IMF was accused of administering the same medicine to patients with different diseases through its structural adjustment programme(SAP). The Fund was also accused of making economic and social conditions worse for countries than improving them. The Fund was so unpopular in the 3rd World including Zambia that nobody wanted to hear the mention of the name IMF. The IMF stock got such a battering that few countries wanted its money. The widespread condemnation did not go unnoticed and the Fund started considering reforms in the new century.
When Zambia, was weaned off the IMF through the HIPC program, Zambians vowed, “Never, Never again shall this beautiful and highly endowed nation ever allow the economy to be mismanaged like Kaunda’s dictatorship did, thereby allowing IMF to control the economy and telling us what to do even if it is not in national interest .” Alas, 20 years on, the IMF is back! The reasons for bringing back the IMF are well documented and as recent as October 19, 2016, the Minister of Finance reiterated the same and this not the purpose of this article.
In the 1980s and 1990s, the IMF as an institution was almost becoming irrelevant as most countries did not want to borrow from it as a result; it accumulated huge unutilized financial resources. The situation only changed in 2008 due to the financial crisis and the 187 member country organisation with over $847 billion capital, took centre stage.
The advent of the financial crisis of 2008 has thrust the IMF into a central position of lending to develop and developing countries and has arguably become the most powerful of all international organisations. The IMF currently has programs with more than 50 countries around the world and has committed more than $325 billion in resources to its member countries since the start of the global financial crisis in 2008.
21st Century IMF – What has changed about the IMF
The IMF experienced a decline in lending prior to the financial crisis in 2008 as demand declined as countries were avoiding their loans. The Fund decided that there was a need to adapt the IMF’s lending instruments to the changing needs of member countries and the fund conducted a wide-ranging review of its lending facilities and terms on which it provides loans.
In 2001, the IMF created an Independent Evaluation Office (IEO). The IEO was to conduct independent and objective evaluations of IMF programs. For example, a report on the success of the IMF’s exchange rate policy advice from 1999 to 2005 found that the IMF “was simply not as effective as it needed to be in both its analysis and its advice, and in its dialogue with member countries.”
In March 2009, the Fund announced a major overhaul of its lending framework, including modernizing conditionality, introducing a new flexible credit line, enhancing the flexibility of the Fund’s regular stand-by lending arrangement, doubling access limits on loans, adapting its cost structures for high-access and precautionary lending, and streamlining instruments that were seldom used. It has also speeded up lending procedures and redesigned its Exogenous Shocks Facility to make it easier to access for low-income countries. More reforms have since been undertaken, most recently in November 2011.
Governments Ownership of Programs
The IMF has changed from imposing a program on the country. The Fund now asks the host country to design its own economic reform program which of course should address issues that caused the economic problems in the first place. The IMF and the governments agree on a program of policies aimed at achieving specific, quantified goals in support of the overall objectives of the authorities’ economic program. For example, the country may commit to fiscal targets or foreign exchange reserve targets. This is said to ensure ownership of the program by the beneficiary of the loan which is the host country. The IMF provides technical assistance in the formulation of such a program. The IMF has come to realize that conditionalities succeed only if they are “owned” by the target government.
Emerging economies influence
The IMF has changed with regard to voting rights. As a result of reforms, more than six per cent of the quota shares were shifted to emerging and developing countries from the United States and European countries. The USA has been the largest contributor to the IMF and has had veto power on IMF decisions. Before the reforms, the USA had 16.75% voting rights whereas the giants of the emerging markets—Brazil, China and India—had only 8% of the voting rights, even though they accounted for 19% of global output.
As a result of reforms, emerging and developing economies have gained more influence in the governance architecture of the International Monetary Fund (IMF). India’s voting rights increased to 2.6 per cent from 2.3 per cent, and China’s increased to six per cent from 3.8%. Russia and Brazil are the other two countries that gained from the reforms. U.S voting share has marginally dropped, from 16.7% to 16.5% but the country still holds a veto power. The reforms have brought India and Brazil into the list of the top 10 members of IMF, along with the U.S, Japan, France, Germany, Italy, the United Kingdom, China and Russia. Canada and Saudi Arabia have slipped below the top ten in the process.
“I commend our members for ratifying these truly historic reforms,” IMF Managing Director Christine Lagarde said at the time the reforms were approved . “ A more representative, modern IMF will ensure that the institution is able to better meet the needs of its members in a rapidly changing global environment.”
IMF has long been critiqued for its lack of transparency. Despite a history of secrecy concerning how it does its business, current internal policies have focused on transparency of the IMF and the Fund has published thousands of reports which are available to the public. Since 2010, there is a Public Information Notice, which assesses the member’s macroeconomic and financial situations which are now published when agreed upon. This shift in IMF policy reveals the importance of public opinion concerning IMF decision-making processes. Despite this unprecedented transparency, however, the internal discussions remain inaccessible to the public.
SAP replaced by Crisis lending
The IMF has implemented reforms relating to developing countries whereby it is more focused on short term crisis lending and not long term lending which the dreaded Structural Adjustment Programme (SAP) of the 1980s and 90s was. It made the IMF ape development fund institutions which was what it was intended for. The Fund is also now more focused on monetary and fiscal policy conditionality being fulfilled before any loan is disbursed. The United States Congress established the International Financial Institution Advisory Commission ( The Meltzer Commission) whose conclusion was that, “IMF should focus on monetary, fiscal and exchange rate policies plus financial-sector surveillance and reform and stay out of longer-term structural adjustment.”
What has not changed about IMF
The IMF is not a democracy but a collection of voters whose power are based on their quota subscriptions. It has not changed in this regard.
In IMF decision-making, states’ votes are weighted according to their “quota subscriptions” – the sum of money that each country pays to the IMF upon joining the organization. Because each state’s percentage of votes is tied to economic indicators, IMF votes reflect not just the Fund’s five largest shareholders and the IMF’s professional preferences of states but the preferences of the Fund’s richest and most powerful members. The Managing Director has been reported to rarely act against the will of the US since the US has veto power over his or her appointment and reappointment.”
It is not a secret that international politics plays a part in IMF voting as powerful members use their influence to further political goals and reward allies. Governments who are considered important allies of the IMF’s most influential members – like the United States – sometimes receive preferential treatment from the IMF. The IMF may bail out some countries out of economic crises with large loans even if they fail to fully comply with IMF conditions of changing economic policy.
In his study on disbursed IMF loans, Storm Thacker concluded that “political friends of the US are more likely to receive loans than are its enemies… the more closely a country aligns with the US, the higher the probability it will receive a loan from the IMF.”
The IMF disagrees with the above assertion. According to the IMF’s official stand, “Loans are made strictly on the basis of the monetarist ‘Financial Programming’ model and a ‘Doctrine of Economic Neutrality’ that is blind to such factors as international politics and the nature of developing country regimes.” However, this statement does not explain how certain countries receive preferential treatment and it ignores the political economy of international lending and geopolitics.
Most critics agree that conditionality is the main area the IMF needs restructuring. Despite the evidence of the aberrant effects of IMF programs, some loan conditions harm economic growth and citizen rights, the IMF still applies them in their agreements.
The IMF conditions are designed to ensure that the borrower pays back the money as well as to develop a free market economy within the member country (if they have not already done so) so as to attract outside investors and integrate a country into the global economic system. The IMF’s recipe for sustained growth normally includes the following measures:
- Deregulation of international trade and finance, which entails “lowering or eliminating tariffs on imported goods
- Dismantling quotas and domestic monopolies
- Deregulating capital markets
- Introducing currency convertibility ( allowing currency to float- no support)
- Opening up industries,stock and bond markets to direct foreign ownership and investment.
- Reduction in government spending and foreign borrowing
- Encouraging privatization of state owned enterprises
- Increasing taxes and enforcement.
- Removal of subsidies including agriculture subsidies
The critics of the Fund argue that while most of the above policies may work in developed countries, they more often than not have negative effects in least developed countries. Despite this, the IMF has increased the use of conditionalities over the years to open up the markets of receiving countries to unfair foreign competition. It is ironic that developed countries, while in the same state of development as the third world countries, did not use similar policies a century ago. Up to now, advanced capitalist societies like the EU and USA still apply protectionist economic policies and subsidise their farmers but they would want countries like Zambia to remove production subsidies from farmers and thereby endanger the countries’ food security!
The studies by various economists paint a consistent picture of an institution bent on fully opening up economies to foreign investors on advantageous terms at almost any cost. The IMF program are said to lead to the destruction of domestic productivity capacity and local demand, aggravating poverty and income inequality, the deterioration of education and health-care systems, and as has been…dangerously expanding vulnerability of those economies to forces external to their governments.
Despite the above negative effects, according to some studies, IMF programs have been correlated and credited with an increase in free and fairer elections, free speech, and the right to organize in countries that have been under IMF agreements the longest. In some countries, therefore, the IMF has been said to be a blessing in disguise by their citizens in that it has helped them move from dictatorship to a democratic dispensation with good governance, rule of law, control of corruption, freedom of the press, strong and independent governance institutions. Zambia’s experience in the 1990s and first decade of the century is a good example , but can lightening strike twice?
In the case of Zambia in 2016 onwards, the economic and good governance benefits of the impending Economic Recovery Programme under the supervision the “new” IMF is an open question at the moment. The jury is out and it is only posterity that will tell.
The writer is a Chartered Accountant by profession and a financial management expert. He is an independent and non partisan commentator/analyst. He has lived in the diaspora in England, South Africa and Botswana for over 25 years before returning home two years ago.