The problem for supporters of an expansion of the IMF is its track record

by Shaun Richards

As the Corona Virus pandemic rages many eyes turn towards world bodies for help. In the financial world a major one is the International Monetary Fund and there have been some grand suggestions for its role in the years ahead. Let me take you to FT Alphaville from a last month.

It is time for the IMF to act, like it did in mid-2009. At that point in time, the IMF issued 183bn SDRs, which at the time amounted to $287bn. While on paper, those SDRs are promises against local currency promises of each member-country, in reality the IMF creates them out of thin air.

Let us park for the moment the danger in creating money out of thin air and consider the impact of the words of Andres Arauz, Ecuador’s former minister of knowledge. In fact he then went even further.

This time, the IMF should forget about conditionality or loan-facilities and should straight up issue 10 times the amount of SDRs that were issued in the midst of the Global Financial Crisis a decade ago. We have no time to make the allocation shares more just, but we have no restriction as to the amounts issued. Out of the 3tn SDRs, almost 167bn SDRs would flow to African countries; that is a little over $230bn in fresh foreign exchange for all of Africa.

For those unaware an SDR is a Special Drawing Right and is defined as follows.

The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi)

As of yesterday the expansion suggested above would be worth US $4.1 trillion which even in these inflated times is a tidy sum. If we stay with the rationale there is a suggested change on the 2009 expansion because of this.

Most of that amount went to rich countries who just parked the SDRs in the most remote and inaccessible part of their balance sheets. In contrast, all of Africa got about USD 16 billion worth of fresh SDR and all of South America received about USD 15 billion.

There is an interesting side issue in that the much trumpeted expansion mostly went on a road to nowhere. But sticking with the African issue Mr.Aruaz thinks a relative little went a long way.

However, for many countries of the Global South, those newly created SDRs were crucial for their balance of payments needs. For example, the fresh USD 668 million allocated to the Democratic Republic of Congo were 860 per cent of their international reserves at the time….. $38m amounted to 33 per cent of Gambia’s.

Actually I think that he has somewhat undermined his own argument here because if you can do a lot of good with relatively small sums why is his request so large?

The Media

They portray the IMF in a favourable light especially when it plugs arguments they agree with as here is Faisal Islam of the BBC.

The IMF has suggested the UK and the EU should not “add to uncertainty” from coronavirus by refusing to extend the period to negotiate a post-Brexit trade deal.

You would think that she has much bigger fish to fry right now although her preoccupation is explained later as she heaps praise on the Bank of England.

The IMF chief, a former vice-president of the European Commission, also heaped praise on the UK Treasury and Bank of England’s “early” and well co-ordinated economic response to the crisis.

She said: “That very strong package of measures is helping the UK, but given the UK’s sizeable role in the world economy, it’s actually helping everyone.”

Tell that to smaller businesses.

The fawning continued with the acceptance of the World Economic Outlook earlier this week which told us this.

As a result of the pandemic, the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis.

A fair counterpoint would be to note what they told us in January.

Global growth is projected to rise from an estimated 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent for 2021.

Things have changed since then but only 3 months ago they were completely wrong which raises two issues. The dangers in such analysis in an uncertain world and the fact that the IMF isn’t very good at it.

Debt Relief

This is more of a positive for the IMF as we note this announcement from Monday.

The countries that will receive debt service relief today are: Afghanistan, Benin, Burkina Faso, Central African Republic, Chad, Comoros, Congo, D.R., The Gambia, Guinea, Guinea-Bissau, Haiti, Liberia, Madagascar, Malawi, Mali, Mozambique, Nepal, Niger, Rwanda, São Tomé and Príncipe, Sierra Leone, Solomon Islands, Tajikistan, Togo, and Yemen.

So a long list of poor countries will get this.

The CCRT can currently provide about US$500 million in grant-based debt service relief, including the recent US$185 million pledge by the U.K. and US$100 million provided by Japan as immediately available resources. Others, including China and the Netherlands, are also stepping forward with important contributions.

Nice to see my country the UK taking a lead here

Comment

The IMF is often presented as something of a saviour but there are a lot of problems with this view. From time to time it is but the presentation of it as being something of a “free good”in the line of an expansion of SDRs has problems. We are in effect raising the world’s money supply which is likely over time to lead to inflation so there are costs ahead. If only just creating money solved all our problems! The credit crunch would have ended in 2011 if that was so.

Also as I have written before this ignores the way that the role of the IMF has been twisted. It used to be an organisation which dealt with trade issues and whilst it had troubles it also has successes. However under two French Managing Directors it was pushed towards fiscal problems and thereby involved in the Euro area crisis. This to my mind was inappropriate on two levels. Firstly the change in the role of the organisation and secondly aiding an area which had plenty of resources but did not want to use them on the scale required. It is part of world realpolitik that we get European leaders of the IMF and sadly they have bent it to their own ends. They have involved themselves in creating one of the greatest economic depressions in a first world country with their austerity policies in Greece. Now they wish people to take them seriously about fiscal stimulus when the track record there has been a disaster and of course is about to get even worse.

Then there is the issue of Argentina which is the largest programme the IMF has ever had and was reviewed in glowing terms by Christine Lagarde when she was managing director of the IMF.

Argentina’s public debt is unsustainable

Actually even when it was lending the money it thought this.

At that time, the IMF assessed Argentina’s public debt to be sustainable, but not with high probability

Eh? Anyway this is what happened next.

Since July 2019, the peso has depreciated by over 40 percent, sovereign spreads have risen by
over 2700 basis points (Figure 1), net international
reserves fell by half, and real GDP contracted more
than previously anticipated.

The Buenos Aires Times put it like this on Tuesday.

Argentina has been gripped by recession for two years. GDP contracted by 2.2 percent in 2019. During a currency crisis in 2018, the Mauricio Macri government tapped the IMF for the largest credit-line in the Fund’s history, worth some US$57 billion. The country has received US$44 billion to date.

So can the IMF help in individual cases? Yes and I hope it does as some poor countries will be hurt dreadfully by this crisis. Would I give it anything like a blank cheque? No based on its rather poor track record and the way its objectives have been twisted.