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FINANCE: IMF Rebuts Critical Report on Lending

Eli Clifton

WASHINGTON, Oct 15 2009 (IPS) - The International Monetary Fund is on the defensive over a recent study which charged that a majority of countries with IMF agreements have been subjected to pro-cyclical fiscal or monetary policies during the global economic downturn, exacerbating the effects of the recession and harming some of the world's poorest economies.

The IMF responded to the report by the Washington-based Centre for Economic and Policy Research (CEPR) with a lengthy rebuttal asserting that it "reaches seriously misleading conclusions about the pro-cyclicality of policies in IMF-supported programs, relying on faulty analysis and often inaccurate information."

"The main point of this report is that growth forecasts were too optimistic when programs were designed, leading to excessively tight fiscal and monetary policies. Reality is quite the opposite," the IMF rebuttal said.

The CEPR report, released last week, had found that in 31 of the 41 sample countries with IMF agreements, the IMF recommended pro-cyclical monetary or fiscal policies, and in 15 cases pro-cyclical monetary and fiscal policies were recommended.

"More than a decade after the Asian Economic Crisis brought world attention to major IMF policy mistakes, the IMF is still making similar mistakes in many countries," said CEPR co-director Mark Weisbrot in a statement. "The IMF supports fiscal stimulus and expansionary policies in the rich countries, but has a much different attitude toward low-and-middle income countries."

"They're loaning money which taxpayers from around the world are contributing. They should be able to really help countries improve their economic situations and do what rich countries are doing, doing stimulus packages that work," he told IPS.

"Our report is objective and took a look at the countries that have agreements with the Fund and asked if the IMF, some time in the last two years, has agreements with policies that made the downturn worse in these countries," he said in an interview. "The answer was 31 out of 41 countries [were made worse] with a very conservative definition [of 'worse'] which favoured the fund."

"I wouldn't blame them for getting a forecast wrong, but when you have a bubble this size, especially once it's burst in 2007 and 2008, I think that's a major failure," Weisbrot added.

The CEPR report found that the fund's pro-cyclical policies were often the result of poor data and overly optimistic assumptions about economic growth and recovery. The fund was particularly weak at forecasting Gross Domestic Product (GDP) growth and was forced to revise its forecasts downward for a number of national economies.

"The Fund might respond that it could not be expected to anticipate the depth of the world recession and its impact on developing countries through exports, capital inflows, remittances, access to trade credits and other channels," wrote the CEPR report. "But the Fund should have been more careful in its projections and should have anticipated a severe downturn that would have serious effects on low-and-middle income countries."

The CEPR begins its analysis by criticising the IMF for overlooking reports of a massive U.S. housing bubble issued as early as 2002.

With the collapse of the U.S. housing market in 2006 and 2007 and the financial crisis following the bankruptcy of Lehman Brothers in September 2008, the fund should have predicted a sharp decline in capital flows to developing countries, as has occurred in previous U.S. recessions, argues the report.

Private capital flows to developing countries dropped from 1.2 trillion dollars in 2007 to 707 billion dollars in 2008 and are projected to drop further to 363 billion dollars in 2009, according to World Bank data.

IMF policies are contradictory in that they encourage the use of government spending in Europe and other developed countries to counter the global recession, but IMF loan agreements prevent low-and-middle income countries from implementing the same countercyclical, expansionary monetary policies, says the report.

The report's authors say the IMF justifies this double standard by the fact that if low-and-middle countries stimulate their economies during a downturn, they may expand current account deficits and run low on foreign exchange while EU countries, the U.S. and Japan don't face the same constraints.

The CEPR criticises the IMF for focusing on the fiscal balance of developing countries' economies and current account deficits at a time when the fund should have been providing reserves for borrowing countries to pursue expansionary economic policies similar to those implemented in the world's developed economies.

In addition to discouraging fiscal stimulus in developing economies, the report argued that the fund has contradicted itself by prescribing tight macroeconomic policies during the downturn as a means of increasing confidence and deterring capital flight.

While publically stating its intention to limit capital flight, the fund has either not recommended or, in the case of Pakistan, discouraged the use of capital controls, says CEPR.

The centre argues that restoring confidence and deterring capital flight can be best accomplished through the fund's new Flexible Credit Line which provides large amounts of credit with no conditions – but is only available to Poland, Colombia and Mexico – instead of by encouraging pro-cyclical policies at a time of economic crisis.

The IMF has asserted that the CEPR report has numerous factual inaccuracies in its case studies – particularly those in Hungary, Latvia and Ukraine – and "[i]n virtually all programs, fiscal targets were quickly and substantially relaxed once the extent of the crisis became apparent. Monetary and fiscal policies have deliberately sought to offset the fall in global demand."

"The CEPR study fails to acknowledge that large and upfront financing, together with a supportive macroeconomic policy mix, has allowed most emerging market countries under IMF-supported programs to avoid costly currency overshooting and widespread banking problems – the hallmark of past crises," said the IMF.

The CEPR report examines IMF agreements with: Afghanistan, Armenia, Belarus, Bosnia and Herzegovina, Burkina Faso, Burundi, The Central African Republic, Republic of the Congo, Costa Rica, Côte d'Ivoire, Djibouti, El Salvador, Gabon, The Gambia, Georgia, Ghana, Grenada, Guatemala, Haiti, Hungary, Iceland, Kyrgyz Republic, Latvia, Liberia, Malawi, Mali, Mozambique, Mongolia, Niger, Pakistan, Romania, São Tomé and Príncipe, Senegal, Republic of Serbia, Seychelles, Sierra Leone, Tajikistan, Tanzania, Togo, Ukraine, and Zambia.