
Demonstrators march in the street while protesting the World Bank and International Monetary Fund on April 16 2005.
Is the IMF really the big, bad wolf getting ready to huff and puff and blow our house down?
According to the opposition leader Dr Kenny Anthony, the government is leading St Lucia deeper and deeper into the bowels of the bad guy for the first time in this island’s history. Anthony even compared himself to John Compton, saying, “John Compton and I walk the same path when it comes to the IMF.”But the government position is that the IMF’s Exogenous Shocks Facility has conditions so favourable that it would be remiss—not to say foolish—of them not to take advantage of it.
Anthony points out that in spite of the extremely low interest rate, the IMF is still the IMF and history agrees with him that IMF loans hardly ever leave a country in a better place than where it started. He guided reporters to a statement by the deputy director of the IMF Murilo Portugal who has said that the St Lucia government has already agreed to cut costs and raise taxes as part of a program to get in line with the IMF.
The IMF’s macro-economic policies have, in the past, been questionable at best, and disastrous at worst. In the bad old days, IMF prescriptions for ailing economies often included selling off strategic national assets at bargain basement prices, cutting back on social, health and education programs, slashing jobs and raising taxes. The effect was often exactly opposite to what the countries wanted to achieve. The result was that most countries who signed up for loans with the IMF when they were in dire straits never got out of dire straits. Bad IMF.
That was until the IMF decided to revamp its image and respond to growing international calls for a cancellation of the never-ending debt of the Third World. Over the last decade, pressure from activists and NGOs to stop the deliberate impoverishment of the Third World led to widespread cancellation of the monumental debts of countries which had first taken loans from the IMF in the 1970s and sunk deeper and deeper into debt through-out the 1980s and 90s. Eventually, the IMF gave in. Good IMF.

Olivier Blanchard, the IMF’s chief economist.
Ever since liberating nations in Africa, South East Asia and Latin America from their debts, the IMF has been working assiduously to change the Third World’s view of what it means to do business with the big, bad wolf.Hence, the ESF. In Africa, at least, it worked. Right now, in some countries in Africa, the IMF has a public approval rating of up to 70 percent.
The ESF was actually in place since November 2005, but like other IMF emergency and compensation funds—like the Emergency Post-Conflict Assistance, Emergency Natural Disaster Assistance, and the Compensatory Financing Facility—much of the money went unused in large part because access not as easy and terms were not attractive. (Compensation facilities have been around for quite some time—but they were rarely used by Developing Countries as the assistance was always very slow, expensive and granted only with certain conditions.)
In September of last year, the ESF was revamped to make it easier for countries in need to have rapid access to emergency funding. In April of this year, when Prime Minister Stephenson King first announced St Lucia was borrowing from the IMF, the shock fund was again revamped to make it easier and faster for low-income countries to get and use the funds.
The truth about the ESF is that it isn’t the old IMF. There’s an unbelievably attractive 0.5 percent interest rate, a five-year grace period and 10 years to pay. The ESF is meant for countries with a per capita income of less that US$895 a month, as long as they have no outstanding payments to the IMF. This made 78 countries eligible for ESF concessionary funding. At first a country could borrow up to 50 percent of its quota in the IMF. After two revamps, a country can now borrow up to 150 percent of its quota.
First the country asks for a specific amount of assistance to deal with an exogenous shock. This amount will be granted without being challenged by the IMF. But there is a ‘but’. The country must show there is a balance of payment problem which is the result of a sudden and exogenous shock; the country must show that no structural adjustment is needed; and the country needs to have submitted a preparation status report, plus an analysis in form of a Joint Staff Advisory Note within the previous 18 months. The need for a country to have a poverty reduction strategy paper in place was dropped after the last revamp.
The IMF alone determines how the requested amount will be disbursed. In case a disbursement took place in the absence of a need, the country is expected to repay the amount plus interest within 30 days. If the country fails to repay within that period, “the Managing Director shall promptly submit a report to the Executive Board together with a proposal on how to deal with the matter.” As for the dreaded structural reforms, the IMF board would only say that they “could be less ambitious than under a PRGF arrangement.” (The PRGF is a kind of predecessor to the ESF. Only countries that qualify for PRGF funds can access the ESF.)
That’s quite a few ‘buts’ for money that is supposed to be disbursed quickly and without being challenged. This raised red flags among development experts who worried that the ESF was just a public relations mask for the same old IMF.
Financial and economic analysts pointed out that several things remain unclear. Consultant Jonas Bunte noted that, “The Fund does not provide a specific definition of what exactly constitutes an ‘exogenous shock’. What happens if the shock is a combination of endogenous and exogenous factors as is often the case?” German NGO Erlassjahr was concerned about the definition of what constitutes a shock, the amount of funds that a country requires to tide it over the shock, and the structural adjustment needed to address the underlying cause of the shock are all left “up to the discretionary assessment of the Fund.” Erlassjahr also questions the appropriateness of the timeframe for assistance, eligibility criteria which would exclude many disaster-prone countries, and the sufficiency of the resources available.
It is apparently solely up to the IMF to say what kind of shock would trigger the mechanism. Similarly, no guidelines are available of when a structural adjustment is needed and what criteria it will be based on. In spite of repeated statements by the IMF that it no longer supports ‘hard’ structural adjustment, to many developing countries, it smelt like ‘Bad IMF.’
“It’s not that the IMF instruments are no good,” said Liliana Rojas-Suarez, a senior fellow at the Center for Global Development. But public perception of the IMF as a tool of US policy ensures that “Latin American countries are not going there.”
The ambiguity over the amount of Fund conditionality that will accompany the ESF also made some consultants worry that it might, like its predecessors, go largely unused.
But in practice, countries have received money relatively quickly under the revamped ESF rules. While Latin American countries have shied away from the ESF, African countries have eaten it up by the hundreds of millions.
Another problem waits in the wings, however, and it could dog the IMF if the global economic crisis, for some reason, does not let up in the next year or two. ESF loans are supposed to be given only for a year or a maximum of two years with repayment starting after five years of the first disbursement. Shocks tend to last longer than a year. A World Bank staff paper revealed that “the maximum effect of a commodity price shock is typically achieved only after about four years.” Additionally, these findings make it difficult comprehend why only one loan will be given for one shock. The question is: Does a continuous decline of prices constitute only one shock—or will such a drop be reassessed after some time?
The maximum total amount available to all countries under the ESF would be $11.6 bn. With $3bn for India, $1.3bn for Nigeria and $0.7bn for Pakistan that would leave an average of $88m for each of the remaining 75 countries and only once over 4 years.
Interestingly, after the Tsunami of 2005 the first assessment of total assistance needed amounted to $977m for six countries: Indonesia, Maldives, Myanmar, Seychelles, Somalia and Sri Lanka. Under the ESF these countries together would have been allowed to request $515m —for all different kinds of shocks occurring through 2009.
In the end, it might not even matter, as the entire $11.6bn is not actually available. The numbers are only theory. At the moment, only $2.8bn in contributions from industrialized countries has been committed in 2009. That’s only 25 percent of the total amount theoretically available to all countries. So not only are there questions about whether the money is enough, there are questions about whether the money has been secured.
But whether they are the good guys or the bad guys, the IMF has responded quickly to the global economic crisis, with lending commitments reaching a record level of $157 billion, including a sharp increase in concessional lending to the world’s poorest nations. The IMF has doubled of concessional assistance in 2009-10 to $3 billion a year to assist low-income countries in dealing with the fallout from the global crisis. By mid-July 2009, new IMF commitments to sub-Saharan Africa topped $2.7 billion. The Fund is reforming its concessional lending instruments to make them more flexible and tailored to the needs of low-income countries. The new lending framework is designed to reduce the stigma attached to taking IMF money.
In addition to the doubling of member countries’ access to funds, there is a new flexible credit line for strong-performing countries and reforms that promise an end to structural conditionality. Nowadays, the IMF says it focuses more on achieving objectives instead of prescribing specific actions like higher taxes and cost cutting.