Should the IMF get out of low-income countries?

Added 11 Oct 2007

The IMF’s role in low-income countries continues to be controversial.  Advocates for the Fund argue that the Fund’s presence is crucial for macroeconomic stability as a precursor to sustained growth; advocates against argue that the Fund’s obsessions with macroeconomic stability is actually curbing growth, with restrictive spending, inflation and deficit targets.  For years we have been hearing criticisms that the Fund’s economic targets are too stringent, that it is overly pessimistic about potential aid inflows and that the Fund should not be the gatekeeper for aid and debt relief.

These problems have played out very clearly this year in Sierra Leone having serious consequences for poverty reduction in the country.  All four budget support donors (DFID, EC, WB, ADB) clearly tie their aid to IMF macroeconomic targets.  An IMF review early this year sounded some warning signals meaning both DFID and the EC delayed their disbursements.  Government and donor representatives alike seem to think that the IMF targets are too stringent.  A recent review by the Sierra Leonean government and the budget support donors indicated that the IMF targets were over-ambitious and should be reviewed, saying that “it may be prudent to revisit, together with the IMF, the feasibility of agreed targets.”   Paradoxically, the delays in donor funding as a result of being in the IMF’s semi-bad books serve only to compound the problem, a fact recognised by the donors’ themselves.  The same review says that “Delays in donor financing, induced by fiduciary concerns, will create additional risk, requiring a significant compression of expenditure if fiscal targets are to be met.” 

We can see that the IMF’s judgement on the macroeconomic health of a country can adversely affect aid inflows.  But Dr Lombardi, the President of The Oxford Institute for Economic Policy argued strongly at a recent Oxfam International hosted event which brought together a panel of experts in Washington DC on the 24th September 2007 to discuss the role of the IMF in low income countries, that the IMF’s inaccurate and pessimistic forecasting of potential aid inflows, results in a self-fulfilling prophecy given that “once this forecast becomes the IMF’s own assessment, it does indeed carry weight with regards to donor ability and willingness to fulfil commitments”.   

Tensions between IMF policies and increasing aid flows can also be seen in IMF wage ceilings.  At the Oxfam International event, Jack Jones Zulu, SARPN criticised IMF wage ceilings saying that “because of wage ceilings, a number of countries are constrained in terms of the number of doctors, nurses, and other health personnel that can be hired.”  However, according to Sanjeev Gupta, a participant in the event: “there is a new policy, which the IMF Board approved on July 6 that says that these ceiling will only be applied in certain circumstances”.

Another new move announced was that the Fund and the Bank will join forces and are developing a joint strategy on LICs which consists of a series of pilot projects. These projects will focus on financial sector development, public financial management, and natural resource management. The joint strategy will be formalized in a Joint Bank-Fund Management Action Plan that will first be reviewed by the executive boards of the World Bank and the IMF, and subsequently unveiled ahead of the World Bank/IMF annual meetings later this month.