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The International Monetary Fund’s deployment of $818 billion, often without strings, to help the world deal with the COVID-19 pandemic has some former officials concerned that the institution is abandoning its focus as a difficult lender of last resort to struggling economies.
The International Monetary Fund last year allocated $650 billion in reserves, called Special Drawing Rights, to its 190 member states to deal with the fallout from the pandemic. The fund also allocated $168 billion to help 87 countries deal with the pandemic. About half of the countries received support through the Rapid Financing Instrument, a loan that mostly comes without strings attached.
While governments have welcomed the money in the face of health and economic crises, particularly at the onset of the health emergency, some IMF watchers have long been concerned. Their concern is that the money will help countries that find themselves in tatters because of their poor policies to avoid the IMF’s demand for conventional loans, which often require deep reforms, thus perpetuating problematic underlying positions.
At the same time, the International Monetary Fund’s previous requirements for countries to implement austerity in order to obtain loans, aimed at fixing economies in the medium and long term, have drawn criticism for the pain it has caused in the short term. This has led to protests and sometimes violence against governments that have worked with the International Monetary Fund for decades, in countries from Bolivia to Jordan.
Concerns among economists about the IMF’s lighter conditionality have been simmering for months. There was renewed interest this week after Kenneth Rogoff, a Harvard professor and former chief economist at the International Monetary Fund, questioned the fund for trying to be an “aid agency” rather than a balance-of-payments support for distressed borrowers.
“The IMF’s strong terms are essential to achieving financial stability and ensuring that its resources do not end up financing capital flight, paying off foreign creditors, or domestic corruption,” Rogoff wrote in a column for Project Syndicate. “The epidemic will not go away; nor should the traditional IMF.”
Conditionality, a requirement for countries to obtain loans from the IMF in normal times, is important for two reasons. Countries that avoid needed reforms may have difficulty generating growth or attracting investment that can put them back on a path of economic and financial stability. This can create difficulty in repaying the International Monetary Fund, which uses loans, unlike grants that are often a major part of foreign aid from governments and assistance from the World Bank.
The International Monetary Fund, in response to questions, said that the Covid-19 crisis justifies its strong response, including emergency lending and reserve allocation, and that 32 countries have been using conventional lending programs based on IMF terms over the past two years. The IMF said the IMF has a range of lending tools that allow it to “respond flexibly to the different needs of different countries”.
“The IMF’s role is to help our member countries mitigate and manage crises – and that’s exactly what we’ve done during this pandemic,” the fund said.
Some countries are already using reserves to delay the IMF’s request for a lending program. Argentina, which in 2018 received the largest loan in the history of the International Monetary Fund worth $57 billion, has since September been using its share of the SDR allocation, about $4.3 billion, as a lifeline to make payments to the fund. This came after the nation missed an earlier time target of negotiating a new conditional loan with the International Monetary Fund to replace the previous failed programme.
Among the economists who share Rogoff’s concerns is Martin Muhlezen, who served as chief of staff to former IMF Managing Director Christine Lagarde and then headed the Strategy, Policy and Key Review division that designs, implements and evaluates the fund’s policies. Mhlaysen moved to the position of Special Counsel to the current General Manager Kristalina Georgieva in September 2020 and retired last year.
“At the start of the pandemic, emergency lending was really the only tool we had to respond quickly,” said Muhaleisen. “Now is the time to rethink how much you can give countries without strings attached.”
Part of Rogoff’s concern is that if inflation forces the Federal Reserve to raise interest rates significantly, it could have spillover effects on emerging markets. In this case, the attention paid by the IMF to the disbursement and allocation of unconditional resources may leave the Fund unprepared.
Mark Sobel, a former US Treasury official who also represented the country at the International Monetary Fund, said he does not see the Fund’s work over the past two years interfering with its traditional role of being fast on its feet and acting as a balance-lender of payments especially in crises.
“The Fund continues to have very talented, very energetic staff who will act quickly as the world’s first responder, going out and crafting challenging crisis stabilization programs if the need arises,” said Sobel, Chairman of the US Official Financial and Monetary Institutions. Forum, an economic think tank.
Sobel said that given the limited amount of SDRs that many emerging markets and low-income countries received last year, it was unlikely that countries that needed and went for a conditional loan would be able to put off applications to the IMF for long.
“For emerging markets as a general proposition, it might give them some time as Argentina did for interest payments, but it’s certainly not a permanent lifeline,” he said.
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