The IMF’s lending conditions: slight corrections

Article as analysis
The International Monetary Fund has somewhat relaxed its controversial lending conditions. But they are still hurting the poorest people, as shown by the latest loan to Bangladesh.

In most cases the International Monetary Fund (IMF) attaches strict policy requirements to its loans to countries facing economic difficulties. For a long time its conditions consisted mainly of imposing a radical privatisation and liberalisation policy. It has backed away from this in recent years. Harsh cost-cutting conditions remain however, whereby problem countries receive funds only if they curtail government spending and reduce their budget deficits. This is expected to help them win back the confidence of foreign private investors and quickly induce economic recovery.

The utility of such cost-cutting exercises is highly controversial. Since the Asian crisis of the 1990s, prominent economists such as Paul Krugman and Nobel Prize laureate Joseph Stiglitz have been warning that budget cuts compound crises rather than resolve them. Civil society organisations criticise the IMF austerity requirements for hitting the poorest population groups the hardest. In their view, instead of trying to force short-term economic stabilisation, the IMF should opt for a long-term development.

Relaxed conditionality

Years of criticism of its austerity measures have led to some rethinking at the IMF, at least of its policy towards developing countries. Accordingly, since the onset of the present financial and economic crisis in 2008, the Fund has created new credit instruments that are almost devoid of conditionality. Moreover, it stresses that cost-cutting measures in developing countries should not affect social spending and poverty reduction programmes. Jointly with the World Bank, it has even been working out proposals for ways in which social safety nets for the poorest can be reinforced.

A recently published in-house evaluation of the latest IMF loans (done systematically since 2008) finds that these decisions have not just remained on paper. The savings programmes of borrower countries have therefore largely preserved social spending for the poorest. In middle-income countries, such spending has even increased and has tended to do so even more strongly than in countries without IMF loans.

Contradictory policies

Upon closer inspection, however, the outcomes of the internal evaluation look less rosy. The report shows that the IMF generally insists on the elimination of government subsidies for electricity and petrol. It also insists on VAT increases on foodstuffs and other crucial items. Both these measures raise the prices of goods that are vital to poor households. The evaluation therefore recommends that these conditions too should be made markedly more flexible in the future.

It is yet to be seen whether the IMF will follow these recommendations. Various member countries even favour rolling back the advances made so far. Switzerland is among those critical of more flexible lending conditions. As such, there can be no talk of a radical rethink. Instead there would seem to be wrangling within the Fund between the advocates of tougher and softer conditions. The upshot is that there are incoherent and contradictory recommendations and conditions.

The example of Bangladesh

A good example of the IMF's contradictory policy is the latest one billion-dollar loan to Bangladesh. In borrowing the funds, the Government in Dhaka did indeed commit to a slight increase in social spending. It nonetheless makes clear that at best the additional expenditures could offset the consequences of the petrol and electricity price increases demanded by the IMF. These increases, however, are but one element of the loan agreement. Another problematic element is that VAT is to be raised on food staples such as rice, lentils and cooking oil.

The NGO alliance Equity Bangladesh describes the conditions attached to the latest IMF loan as «murderous». At a meeting with Alliance Sud, Reza Chowdhury of CoastBD said that the VAT increases would aggravate the widespread malnutrition amongst the poorest sectors and worsen social inequality. The IMF has stubbornly refused to waive the tax increase on staples.