FINANCE: Wariness marks end of global finance meeting

By Pratap Chatterjee Reprint | | Print |

Pratap Chatterjee

WASHINGTON, Oct 13 1995 (IPS) - The late-summer sunshine that warmed senior financial officials from around the world during this week’s meeting of the World Bank and the International Monetary Fund (IMF) did little to dispel a sense of wariness that pervaded this year’s proceedings.

Though a few agreements were reached to avert future Mexico- like crises, underlying problems remain, made worse by slower growth in industrialised countries, sharp cuts in donor aid, and continuing investor uncertainty in key markets. Meanwhile, the situation of the poor, especially in Latin America, Africa, and South Asia, continues to pose threats to social stability.

Unease was especially evident in a small room of the Sheraton hotel where two men sat at a table Thursday to sign several documents.

“The minister signed the documents with much greater confidence than I do,” joked S.J. Burki, the World Bank’s vice- president for Latin America, as he joined Luis Matos Azocar, the Venezuelan finance minister, in signing accords on three loans totalling 148 million dollars. Venezuela is seen as among the most likely candidates for the next Mexico-style collapse.

The new World Bank president, James Wolfensohn, may have put it best in his maiden speech to the annual meeting. After noting the gross wealth disparities in Latin America, he said, “in other regions, too, the gap between rich and poor is getting worse. The distribution of the benefits of growth presents one of the major challenges to stability in the world today.”

He combined that observation with a special plea on behalf of the Bank’s soft-loan facility, the International Development Association (IDA), whose survival has been put at risk by the U.S. Congress. IDA, the largest source of concessional assistance to the world’s poorest countries, may suffer a 50- percent cut in its six-billion-dollar annual lending programme next year and additional reductions if Republican lawmakers get their way.

“Wholesale reductions like those under consideration by Congress will create a tidal wave of human misery that will cause millions of people to suffer and die,” Wolfensohn warned.

The other piece of bad news contributing to the anxiety here are new forecasts by the IMF, as well as the Organisation for Economic Cooperation and Development, of less-than-expected economic growth in industrialised countries. That will reduce demand for developing-country exports and bring down growth rates worldwide.

The one sure accomplishment of this year’s meeting was an agreement by rich countries to double the resources the IMF will have to deal with any major financial crisis, like the Mexican peso’s collapse.

That may be precisely what is facing Venezuela, whose financial authorities appear desperate to conclude agreements with the Bank and the Fund to head off a crisis. On Thursday, IMF Director Michel Camdessus said he thinks Caracas will reach agreement on a financing package by the end of the year.

But the best that can be hoped for from the Bank and the Fund is a short-term injection of cash to maintain investor confidence and keep the economy from crashing.

The bigger issue, noted by Wolfensohn, is how to ensure that the benefits reach the poor. In that respect, the picture is not encouraging, if the record of three other countries in the region — Argentina, Brazil and Mexico — are anything to go by.

Mexico’s devaluation triggered a stampede by foreign and local investors who took with them tens of billions of dollars in precious foreign currency. The IMF and the U.S. government helped patch together a 50-billion-dollar rescue plan by February the ultimate success of which remains in the balance.

But the cash so far has only helped pay back loans taken out by Mexico and shore up the banking system. Little or nothing has gone to the masses of poor people hurt most by the collapse. An estimated two million jobs have been lost this year and consumer interest rates stand at 80 percent, says Carlos Heredia, a Mexican economist.

In Brazil, the Bank and Fund have helped to cut a 17.7-billion- dollar deficit in 1994 to 1.5 billion dollars, and the “Plano Real” economic programme of Finance Minister Pedro Malan has cut inflation from 50 percent a month to less than five percent.

But the anti-inflation policy has caused unemployment to rise to between five and 13 percent, depending on whether you believe the government or the unions, while real interest rates remain high at 30 percent.

While a seven-billion-dollar international emergency loan package put together by the Fund after it bailed out Mexico earlier this year has helped halve Argentina’s current account deficit to 4.4 billion dollars, unemployment exceeds 18 percent.

None of this bodes well for Venezuela, which is already facing a number of social problems. Unemployment has hit 20 percent, while inflation is up to 60 percent. Factory workers take home about six dollars a day. Some 70 percent of the people are believed to be living below the poverty line.

In the last 20 months, the Venezuelan government has bailed out or seized 17 banks at a cost of more than seven billion dollars. The country has imposed controls on taking money out of the country because central bank reserves are dipping dangerously low. It is now seeking a 1.5 billion dollar cash injection from the IMF which will begin formal negotiations within the next few weeks.

At the same time, the 18-month-old government of President Rafael Caldera is wary of the budget- and subsidy-cutting conditions that come with new loans from the Bank and IMF.

In 1989 dozens of people were killed in street riots when Venezuela agreed to cut subsidies in return for cash from the IMF. Two people have already been killed in street violence in the country in recent weeks when prices of petrol were raised.

If Caracas devalues the bolivar from 170 to the dollar to the international rate of 256 more unemployment and inflation are inevitable.

It’s not a cheerful time, despite the warm weather.