The Covid-19 pandemic has posed great challenges for developing countries in meeting their sovereign debt payments. While temporary relief in the form of the suspension of debt servicing has been provided to the world’s poorest 70 countries, servicing of sovereign debt remains a big challenge for many emerging economies.
Despite the growing need for external help in tackling this financing gap, there are reservations about potential IMF assistance across many developing countries, including SA. These reservations are largely due to fears that IMF assistance would come with a structural adjustment programme, and hence undermine the nation’s policy autonomy.
In this article, we wish to contribute to the debate on potential IMF assistance by discussing how the IMF’s coronavirus assistance differs from the traditional standby agreements and how the IMF has transformed over time.
The conditionalities that come with IMF loans have been at the forefront of academic and public criticism of the fund for decades. Through the so-called structural adjustment programmes, the IMF has long imposed privatisation of state-owned entities, deregulation of labour markets and balanced budgets on countries whose governments have signed standby agreements with them. Governments’ freedom to select policy instruments was constrained in an important sense, and many IMF policies had procyclical effects during economic downturns, at tremendous social cost.
While it is important to acknowledge the IMF’s harmful history of structural adjustment programmes, it is also necessary to distinguish the lending facilities the IMF has created as a response to the coronavirus crisis from the fund’s traditional standby agreements, as the former does not come with the conditionality assumed by many critics. Take the IMF’s interest-free rapid credit facility (RCF) as an example. This provides concessional financial assistance to low-income countries that face urgent balance of payments needs without any ex-post conditionality.
While middle-income countries such as SA are not eligible for the RCF, they are eligible for the rapid financing instrument (RFI), which provides financing at a 1.1% interest rate to be paid over three to five years. The RFI comes at a much more concessional rate compared to five-year government bond yields, which fluctuate around 8%. Besides, unlike the traditional standby agreements, these two facilities do not have any enforceable ex-post conditionality.
The IMF’s special drawing rights (SDRs) is another useful tool that needs urgent global consideration. SDRs have been proposed as an instrument to be used in a way similar to John Maynard Keynes’s proposal for Bancor during the design of the Bretton Woods system. SDRs are interest-bearing international assets that are held by the IMF and its member countries. The fund holds the authority to create unconditional liquidity through SDR allocation to all its members in proportion to their quotas at the IMF, which reflects their relative economic standing in the global economy. Through these allocations, the fund provides its members with on-demand access to hard currencies, which members can use to meet their balance of payment needs.
Even though the use of SDRs is not necessarily less costly for many countries than borrowing directly from the IMF, SDRs have the advantage of coming with zero conditionality, including zero ex-ante conditionality. So far, many country leaders, including President Cyril Ramaphosa, have urged the IMF to allocate additional SDRs that can be used for the procurement of essential commodities and medical supplies. If the IMF approves a new SDR allocation, it can provide significant relief without posing any limitations on the country’s policy space in the future.
A second issue worth highlighting is the transformation the IMF has undergone over the years. In the wake of the global financial crisis, the IMF has started changing its position on a few important issues and introduced new tools that reflect these changes. For instance, in 2010 the IMF changed its stance on capital controls (a domain of policy highly relevant to the Covid-19 crisis in developing countries). The IMF’s research wing has published reports showing that capital account liberalisation has not been associated with economic growth, and that capital flows could have destabilising effects.
IMF research further indicated that countries that used capital controls were among the least hurt by the global financial crisis. On the basis of this evidence, the IMF has advised in favour of capital controls as an effective tool of macroeconomic management that can be used to prevent asset bubbles and exchange rate appreciation. These positive steps taken by the IMF towards a more integrative and development-friendly approach to global finance have been acknowledged by some of the fiercest critics of the IMF, including Joseph Stiglitz. Mark Weisbrot, of the progressive Washington-based think-tank the Centre for Economic Policy Research, has argued that the changes to the IMF’s research department constitute the most significant aspect of recent transformation.
While strong negative sentiment against the fund is understandable among the public in many developing countries that have been harmed by Washington institutions, it should be recognised that the IMF is not a static organisation. Just as the global economy has witnessed significant developments over the last few decades, in particular with the rise of China, the IMF has had to move alongside these changes. In recent years emerging markets and developing countries have increased their combined voting share, a shift that was signalled as forthcoming by Dominique Strauss-Kahn in his speech to the Asia 21 conference in 2010.
This is not to argue that the IMF is where it ought to be in terms of representation and policy, but there is value in progressive voices using the recent developments in the institution for progressive ends. In one form or another, the world economy needs supranational institutions capable of tackling global economic imbalances. This is a progressive demand that scepticism towards the IMF should not get in the way of, particularly during these times of crisis.
• Uğurlu and Aboobaker are PhD candidates in the economics department at the University of Massachusetts, Amherst.
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