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Thursday, 14 December 2017

Beyond the gatekeeper's rules

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Recent research coming from the IMF examining the negative impact of austerity and income and gender inequality has fed hopes in some quarters that the Fund is in the midst of a philosophical metamorphosis. But this has not yet translated into a change in the way the IMF and the World Bank operate in Africa.

Since the onset of the financial crisis, which halted the momentum that had built up in global growth, the role of the World Bank and IMF has grown significantly. According to Tim Jones, economist at the Jubilee Debt Campaign (JDC) in a report, The New Debt Trap, loans from the World Bank rose globally from US$2.8bn in 2007 to US$4.7bn in 2013, a 70% increase.

The IMF is particularly important, not only because of the loans it provides directly, but because of the influence it has on the investor community as a whole.

“The IMF has become the gatekeeper that determines access to loans and grants from other institutions,” said Jones. “You need an IMF programme to access funds from the World Bank, but also to get grants from Western governments. That makes it difficult for poor countries to avoid IMF policies such as privatisation, trade liberalisation and labour market deregulation.”

Razia Khan, head of regional research for Africa at Standard Chartered, said: “Investors see an IMF loan as positive because their interests are aligned. The IMF is transparent about its conditions and the timetable for repayment, and provides regular reports on how the country is doing.”

A country implementing the IMF’s macro stabilisation measures is a better credit, said Khan. Whereas “an investment from China is still seen as positive in the sense that improving infrastructure is beneficial, but it is different because China does not require conditionality and benchmarks to be met as the IMF does”.

Africa has been a big recipient of IMF and World Bank loans. Both institutions carry out debt sustainability assessments for some low-income countries or those that have recently moved from that category up into the middle-income bracket.

The two institutions “have a clear conflict of interest when conducting such assessments”, said Jones. However, a dearth of better information leaves JDC no choice but to rely on these data.

Beneficial impact

Jones identifies nine countries that the IMF classifies as most dependent on foreign lending and for which data are available, of which six are African: Ethiopia, Ghana, Mozambique, Senegal, Tanzania and Uganda.

These countries – and the three outside Africa (Bhutan, Laos and Mongolia) – tend to have higher economic growth rates than other countries with similar incomes, he said, suggesting that lending from these development institutions is having a beneficial impact.

However, this is not the whole story. “This faster growth does not correspond to similarly rapid progress in alleviating poverty, which is falling more slowly than the average for low-income countries,” said Jones.

In a review of the International Finance Corporation by the Independent Evaluation Group, it was noted that very few of its projects clearly incorporate poverty reduction objectives during project design. Therefore, such financial support does not necessarily respond to the strategic development priorities of recipient countries, let alone meet the needs of the poor people in these countries.

However, that is not to say such investments do not bring social benefits. Between 2001 and 2012 the IFC made at least nine publicly supported private finance investments in Zambia worth a little over US$130m.

“These projects have managed to create employment, increase availability of credit lines to SMEs and large companies, increase availability of goods and services and improve revenue to the government,” said the African Forum and Network on Debt and Development (Afrodad).

For example, one loan of less than US$1m to the Chingola Hotel project created about 100 direct jobs, said Afrodad, which it estimated improved the lives of more than 1,000 people in the area.

Similarly, in Rwanda, between 2006 and 2013, the IFC made at least nine more investments, worth just over US$55m, according to Afrodad. One of these investments, of just under US$5m for schools to improve the business climate, will have affected about 500 schools and more than 100,000 students across the country, it said.

Poverty and inequality on the up

In many cases the number of people living in poverty has increased in recent years, despite the fact that their economies have been growing rapidly in per person terms, said Jones. For example, in Ethiopia between 2005 and 2011 GDP grew by 60% per person, but the number of people living on less than US$2 a day increased by 5.4m.

Inequality is also rising in all but one of the nine countries monitored, he said. And there is no evidence that any of the nine countries are becoming less dependent on primary commodities for their export earnings, which leaves them more vulnerable to swings in volatile global commodity prices than if the economy was supported by stronger manufacturing or services sectors, Jones said. This has left them particularly vulnerable in the last year, as commodity prices have collapsed.

In Uganda, the government obediently followed the World Bank/IMF policies required for its Structural Adjustment Program, said Herbert Jauch, a freelance labour researcher based in South Africa. As part of its efforts it privatised government institutions and foreign exchange; reduced the size of the civil service and the army; decentralised services to local authorities and cut government spending on social services.

While these reforms did increase economic growth, they also led to a drop in formal sector employment, ill-equipped medication in government health facilities, a collapse of SMEs and declining trade union membership, said Jauch.

In education specifically, Uganda has experienced increasing student to teacher ratios and fees, lower attendance of schools, wage freezes and longer hours for teachers, increased inequality between schools in rich and poor areas and increased attendance of private schools for the wealthy, he added.

There are more specific examples of the damage that critics say IMF-led reforms do to African borrowers. Craig Murray, a blogger and human rights activist, said: “When Ghana needed some temporary financial assistance – against a generally healthy background – the IMF insisted that Volta River Authority be broken up. Right-wing neoliberal dogma was applied to the Ghanaian electricity market. Electricity was separated between production and distribution, and private sector Independent Power Producers introduced.”

Murray says the result has been a disaster. “There are more power cuts in Ghana than ever in its entire history as an independent state. Today, Ghana is actually, at this moment, producing just 900MW of electricity – half what it could produce 10 years ago. This is not the fault of the NDC or the NPP. It is the fault of the IMF.”

Whether this is entirely fair is debatable. “At times it may suit governments to pretend politically unpopular measures are being imposed on them by the IMF, which is suited to the role of bogeyman,” said Sargon Nissan, programme manager for finance and the IMF at the Bretton-Woods Project.

Left hand wondering what the right hand is doing

However, there is growing evidence that the IMF itself is starting to question the conventional wisdom that the reforms on which its assistance are conditional benefit borrower countries. It has begun to tacitly acknowledge the role that public-sector financing can also play in debt crises, said Jones, with its new “debt limits policy”, agreed in 2015, including lower-interest multilateral and bilateral loans for the first time, as well as borrowing from the private sector.

IMF conditionalities attached to their loans have become less onerous over time, in response to civil society pressure, especially with the greater attention these loans have received since the financial crisis.

“The IMF’s commitment to the Washington Consensus has been maintained but there is greater internal discussion than in the past. There has been a re-evaluation of its priorities and a more rigorous examination of the financial system, for example in its research into the risks in shadow banking”

But the clearest example is the research the IMF now puts out on a range of subjects it would not have looked at in the past, and which are particularly relevant in Africa, including water, trade and innovation.

However, there is a growing discrepancy between the work these IMF economists and researchers put out, and the top-level decision-makers at the Fund who direct actual policy.

The measures that it is advocating are evolving, with, for example, new guidance. This suggests that spending in key areas such as education and health is protected. While the IMF was not available to be interviewed, it hopes this will ensure that growth in borrower countries does not lead to such high levels of inequality, for example.

While this is a start, critics argue that a more fundamental shift in policy is required. “If health and education spending is protected, but overall government spending must still be cut, that means even greater cuts elsewhere,” said Jones.

Some also detect an asymmetry in the zealousness of its application of its traditional remedies – labour market reform and cuts to public spending, for example – with those it has started to espouse more recently. Some have even said its failure to police such protections on health and education contributed to the scale of the Ebola pandemic in West Africa.

Nissan said: “The IMF’s commitment to the Washington Consensus has been maintained but there is greater internal discussion than in the past. There has been a re-evaluation of its priorities and a more rigorous examination of the financial system, for example in its research into the risks in shadow banking.”

That is at least a start. And emerging markets could probably do more themselves to push for changes to the way IMF and World Bank loans are granted.

“The IMF has lost a lot of its influence in middle income countries, it is really only important to the poorest countries now. This trend will continue and it will lose influence over poorer countries to China and the BRICS Bank”

“Developing countries don’t use the influence they already have like they do in the World Trade Organization, for example. They don’t vote often and they don’t send particularly senior people to represent them,” said Mark Weisbrot, co-director at the Center for Economic and Policy Research.

Investment sources

While this may change, if emerging markets feel it is in their interests to push for changes at the IMF and World Bank, they may be even less inclined to than before, given the emergence of other sources of investment in Africa.

First among these is China, with its new BRICS Development Bank another significant potential source of loans. Many also have increasing access to capital markets.

“In recent years it has been easier for African sovereigns to tap the capital markets but some have still opted to use concessional financing, which remains cheaper,” said Khan. “But if rate rises lead to a worsening macroeconomic environment, it will be harder to take the capital markets route, which will increase the relative importance of development banks.”

A more diverse supply of lending is good news for Africa, given that its funding needs are too big to be met by a single institution. But it is a challenge for an institution that attaches conditionalities to its investment to compete with China, which attaches no such conditionalities.

The IMF has a remit to promote macroeconomic sustainability in the countries to which it lends, while the World Bank also explicitly looks to facilitate poverty reduction. Bilateral loans from a country like China, by contrast, are made purely for financial or strategic reasons.

Weisbrot said: “The IMF has lost a lot of its influence in middle income countries, it is really only important to the poorest countries now. This trend will continue and it will lose influence over poorer countries to China and the BRICS Bank.”

Nissan is more optimistic about its role: “In Africa, the IMF remains the pre-eminent lender of last resort, though increased investment from China and others puts African countries in a stronger position to bargain with the Fund. It has changed the terms of discussion to an extent,” he said.

However, “increased competition from China and other development institutions has had no meaningful impact on pricing”, said Khan. “What changes to pricing there have been are the result of the macroeconomic environment, particularly QE. If and when the Fed starts tightening policy we will see Africa risk repriced and the cost of capital for Africa increase.”

 

 

To see the digital version of this report, please click here

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com

 

 

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