FINANCE: Too Many Long-Term Loans at IMF, Internal Report says

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Sep 26 2002 (IPS) - The International Monetary Fund (IMF) should let borrowing countries plot their own paths to development, improve its own analysis, and reduce political interference in its decisions, says the Fund’s own Independent Evaluation Office (IEO).

The recommendations, in the first report by the new office, centre on the Fund’s use of loans for prolonged periods of time, which creates many problems for the institution as well as for borrowing nations, says the document.

“Prolonged use has expanded considerably over the last two decades, to the point that a third of current users of IMF resources can be categorised as prolonged users and they account for a quarter of its resource commitments in 2001,” it says.

The report says the Fund’s projections suffer from excessive optimism; it sometimes imposes conditions on borrowers that are onerous and poorly designed, and it underestimates the importance of the countries’ drafting their own reform programmes.

IMF-imposed programmes have traditionally been based on controlling inflation, selling public assets, deregulating laws and liberalising trade.

Local authorities should have initial responsibility for proposing a reform programme, whose core elements should be subject first to a debate within a country’s own policy-making institutions, recommends the report.

The report’s authors explain that prolonged use, or repeated borrowing, results from the Fund’s attempt to assist low-income countries, such as Senegal and Jamaica, deal with balance of payments problems that are “structural in nature and therefore require a longer time to overcome”.

But they say that strategy may have backfired, so that IMF credit lent to prolonged users now revolves very slowly. For example, the most prolonged user of all, the Philippines, has had obligations outstanding to the IMF since 1967, the report reveals.

The paper acknowledges that the use of long-term loans, as opposed to the Fund’s original mission of short-term lending, reflects the desire of donor countries – mostly the rich and powerful Group of Seven most industrialised nations – to have the Fund provide “a seal of approval” that could validate other sources of financing, including debt restructuring.

That, says the report, shows “deficiencies in the way IMF policies are formulated or implemented”.

Civil society groups, long-time critics of the agency, say the prolonged use of loans is intentional and permits the IMF to control poor countries, via an institutional culture that says its experts “always know better”.

One of those critics said Thursday the IEO report is a good start towards reforming the Fund. “I am glad to see that it’s not completely the party line but it’s not that radical though,” said Robert Naiman of the Centre of Economic and Policy Research (CEPR).

“If vigorously enacted some of the reforms that they advocate could have meaning.”

Naiman said the recommendation that the so-called economic reform programmes be subjected to debate within borrowing countries before being adopted was a step forward, but that the report offered little about assessing programmes or opening up Fund meetings.

The report says that the excessive conditions that the IMF places on countries can sometimes overburden them. “To agree on programmes even when the probability of success is low, increases the likelihood of failed programmes and repeat borrowing,” it says.

“In many cases, difficulties in implementing core institutional reforms were at the heart of the protracted adjustment difficulties that led to prolonged use,” it adds.

Such shortcomings in designing and executing programmes have led to persistent balance of payments problems, which encourage long-term use, or repeat borrowing, according to the report.

That prolonged borrowing has resulted in numerous interventions by the Fund, preventing borrowing countries from creating their own robust policies.

“There is also some evidence that prolonged use weakens the credibility of the ‘seal of approval’ provided by IMF-supported programmes,” says the report.

The IMF should try to offer the international community a broader mix of tools, including strengthened surveillance, which would also deliver seals of approval to donors and creditors.

The IEO, chaired by Montek Sigh Ahluwalia, a former Indian finance official, is also working on an assessment of fiscal adjustment in IMF-supported programmes and the role of the Fund in recent capital account crises in Brazil, Korea, and Indonesia.