The IMF is known
to be a controversial organization. No, I’m not talking about Tom Cruise’s IMF
which appears in the Mission Impossible films. I am, in fact, talking about the
International Monetary Fund (IMF).
Everyone seems to
have their own views on the IMF especially in Pakistan:
“They’re evil”.
“They’re wrong”.
“They represent
western interests”.
“They do what is
necessary”.
A lot like Tom
Cruise’s IMF, people think the International Monetary Fund is a shadow
organization – hiding in the shadows and dark corridors of Washington DC. But
what does the IMF really do? And what are its aims and objectives?
The IMF’s
objectives and role
A quick glance at
IMF’s mission statement would reveal three major objectives of the
organization: encouraging international trade, promoting financial stability,
and encouraging economic growth.
It achieves these
objectives by famously acting as a ‘lender of last resort’ under its lending
programmes while also advising nations as a consultant or otherwise. Take
Pakistan as an example. Pakistan has entered 22 IMF programmes mainly due to
its frequent balance of payment (BoP) crises.
A BoP crisis arises
usually when a nation is unable to service its foreign liabilities. Such a
crisis is soon followed by speculation against the nation’s currency leading to
rapid currency depreciation as well as plummeting confidence in the economy. The
end result is usually a recession.
So, what does the
IMF do? The IMF lends foreign currency when no one else is willing to; or if others
are willing, it is at a prohibitively high interest rate. But lending from IMF
comes with strings attached – its conditions. The aim of these conditions is to
resolve the issues that led to the BoP crisis.
Usually, the
conditions include higher taxes and reduced expenditure to decrease fiscal
deficit and stabilize debt-to-GDP ratio. They also include currency
stabilization plans through a free-floating exchange rate system and an
increase in foreign exchange reserves (through higher interest rates). Or
occasionally a currency peg if necessary and suitable.
The intention
behind these conditions and IMF’s willingness to lend is to revive confidence
in the economy. Normally, an IMF loan and agreement allows a nation to gain
access to funding from other multilateral institutions like the World Bank or
Asian Development Bank. Meanwhile, it puts foreign investors at ease and
restarts the regular flow of international capital. By reviving confidence, it
is expected that investment and consumption will return to their potential
levels (before the crisis), hence returning the nation to a path of growth.
Besides the
lending programmes, IMF also offers consultation missions. Most frequently, the
gulf nations such as Saudi Arabia avail the IMF’s consultation services to help
achieve macroeconomic policies and goals. The IMF also offers unsolicited
advise when it feels necessary. For instance, during the UK government’s mini
budget crisis in September 2022, the IMF publicly advised the UK to reverse
their plans of increasing spending and reducing taxes.
Why the IMF
has been controversial
IMF has come under
attack from plenty of institutions and notable figures. Nobel-prize winning
economists Joseph Stiglitz and Paul Krugman have accused IMF’s policies of
being counterproductive. They argue that when a country falls into a BoP crisis
and subsequently a recession, there is a need to revive demand by having monetary
expansion as opposed to contraction. Paul Krugman goes as far as to assert that
the free flow of capital has to be paused temporarily to avert speculation. The
IMF’s policies are in contradiction with such views (orthodox vs Keynesian
views).
The IMF is also
criticized for being a political tool of the West. Western nations are the
largest contributors to the IMF and have the largest voting share in the IMF.
In particular, the United States has 17% of the voting share in IMF – essentially
making it a veto power. This makes the IMF a political as well as economic
organization, its critics say.
Moral hazard is
another factor for which blame is hurled on the IMF. Moral hazard is an event
where a person or organization is incentivized to take riskier actions without
consequence. How does it apply to the IMF? The IMF gives a bailout with
conditions attached under a programme which lasts for a few years. Once the
programme is over, the concerned government returns to its old ways and falls
into similar problems which brought it to the IMF in the first place. Why?
Because the government knows the IMF will bail it out again. A case of heads the
government wins, tails the IMF loses.
What have the
results been?
The results of the
IMF’s efforts have been mixed. Some countries have successfully used IMF
programmes to spring themselves onto a path of prosperity like Jordan. Others
have spiraled into deeper and deeper crises such as Argentina.
The key issue with
IMF programmes is the nature of the organization and the length of its
programmes. The IMF has significant resources at its disposal to help any
country with their macroeconomic troubles. However, the political nature of the
organization limits its ability to effectively act as a lender of last resort.
Instead of acting like a global central bank as one of its founding fathers
Keynes had intended, it acts like a commercial bank willing to take on losses
for the sake of political motives. Although it must be recognized that having a
global central bank is next to impossible due to issues of sovereignty in
global politics. Instead, our unipolar world has to settle and compromise for
an organization that is dominated by the United States.
The other issue
with the IMF is one that can easily be resolved. The length of IMF programmes
is between roughly three to five years. The programmes are too short to carry
out reforms and see the results they bring. By extending the length of the
programmes, the IMF can keep concerned governments tied to the conditions of
the programme for longer, thus seeing a greater chance of success.
Still even in its
current condition, the IMF is necessary for the global economic system and
world order. A lender of last resort is essential to avoid the mistakes of the
past. During the great depression, the world deglobalized as countries set up
more trade barriers in favor of protectionism leading to a prolonged economic
crisis. The IMF is essential in ensuring that international trade is maintained.
The world has come
to realize that letting a nation’s economy collapse is not only bad for global productive
capacity but also global demand. The IMF may not be perfect firefighter but
it’s the best we have right now.
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