The global financial twins, the International Monetary Fund (IMF) and the World Bank (WB), will have their annual spring conference next week, October 12 to 18, 2020. Virtual.
However, an item in their agenda is not virtual. It is solidly concrete: the deepening debt crisis of the developing world. Per estimate by Joseph Stiglitz, former chief economist of the World Bank, the collective debt of the developing countries has ballooned to over a trillion dollars, and the debt service due this year is at least $130 billion. The poorest countries of the world, located mostly in Africa, are not only NOT in a position to allocate any debt service budget; they are also facing a life-and-death struggle to stave off mass hunger while fighting an invisible coronavirus with limited resources.
A growing number of economists are warning: the debt crisis of developing countries is shaping into a global catastrophe. The Covid-19 pandemic has flattened their economies and their capacity to support the survival requirements of their respective populations.
It is against this background that the IMF set up a Rapid Credit Facility (RCF) and a Rapid Financing Instrument (RFI) to meet the emergency financing needs of over 100 least developed countries. Together with the World Bank, the IMF pushed the G-20 countries in April to establish the Debt Service Suspension Initiative (DSSI).
Outcomes from the above initiatives are extremely disappointing. As pointed out in an earlier column, the IMF’s RCF and RFI got a measly $50 million funding, which obviously cannot make a dent on the trillion-dollar plus debt of the developing world.
As to the DSSI, the European Network on Debt and Development tersely described it as a mechanism for “Draining out the Titanic with a bucket.” EURODAD pointed out that the DSSI does not cover the multilateral (e.g., World Bank and IMF) and private creditors. Hence, money freed from paying the debt service to the bilaterals (e.g., French aid agency) can easily be diverted to pay other debts instead of funding the needs of the Covid-stricken citizens of a borrowing country.
Additionally, the DSSI does not provide a safety net for all countries in desperate need of debt relief. In particular, middle-income countries, many of whom are in economic and health crisis, are left out in the DSSI program. The Philippines is one of them.
Now back to the IMF-World Bank annual meeting next week. Through a series of press releases, the twins are broadly hinting that they are more than prepared to finance all the budgetary needs of the developing world. In particular, the IMF’s Managing Director, Kristalina Georgieva, has been saying that the IMF has “a trillion-dollar lending capacity” to address the financing needs of the developing countries.
In this connection, one major policy issue to be taken up in the annual meeting is the proposed creation by the IMF of “new” international reserve assets worth $1 trillion. These reserve assets, called Special Drawing Rights (SDRs), can be distributed to the central banks of the 189 Member Countries of the IMF based on each country’s “quota share.”
The biggest SDR shares—as much as 60 percent—are owned by the United States and the European countries. So if SDRs are created, they also get 60 percent of the SDRs.
However, the proponents of SDR creation argue that the developing countries, with limited shares, shall still benefit in a substantial manner because their economic base is relatively low. Thus, the GDP of a poor country like Jamaica shall increase by 7 percent and its international reserves by 30 percent should the IMF succeed in convincing Member Countries on the issuance of $1 trillion worth of SDRs.
Getting the consent of Member Countries on the trillion-dollar SDR issuance is a challenge. It can only happen if the IMF is able to mobilize the support of a “supermajority,” meaning the votes of those who hold at least 85 percent of the IMF quotas. The United States, with 16 percent of the quotas, can effectively veto any SDR creation initiative.
This brings us then to the character of the IMF as the world’s “debt policeman.” In a webinar organized by the Freedom from Debt Coalition, Dr. Walden Bello pointed out that the image-building program of the IMF in recent years has not altered the reality that the IMF remains as an institution dedicated fully to the advancement of the interests of its master founders: the United States and Europe. This is reflected in the percentage shares of the IMF quotas and in the appointment of who shall serve as the Managing Director, a position reserved to a European.
The unswerving commitment to the advancement of the interests of the founding developed countries is also reflected in the IMF’s handling of the debt crisis. It has not been supportive of any substantive debt relief or debt cancellation for Member Countries in crisis. The IMF simply wants debt restructuring or re-financing or debt service suspension for a certain period (like the DSSI), all of which provide placebo or temporary relief to debt-ridden borrowing countries.
Walden questions the IMF’s claim that it has now become Keynesian and has abandoned neo-liberalism, which forbids government intervention in the market in support of social and labor protection. Walden cites two illustrative cases. In Ireland, the “IMF cure” to the 2008 financial crisis of this country came in the form of “the toughest austerity program in Europe”, per report of the New York Times. Because of this austerity program, as many as 25,000 public sector jobs or 10 percent of the government’s work force were downsized.
A similar austerity program was applied in Greece by the IMF, which coordinated the program with the European Commission and the European Central Bank. A “debt write-off” for Greece was accompanied by painful policy conditionalities: cut in public sector wages by 17 percent, reduction of pension benefits by 20 percent to 40 percent, and rollback of labor protection standards. The point, said Walden, is that the IMF has not given up its old programs of enforcing debilitating economic austerity programs and imposing neo-liberal “structural adjustment” policy conditionalities such as privatization.
As to the debt crisis being experienced by the developing countries today under the pandemic, the IMF and the World Bank have been busy designing new debt re-scheduling programs such as the failing DSSI in order to help the lenders—multilaterals, bilaterals and private commercial—get back their money with a handsome profit sans any “haircuts.” The basic lending framework has not changed. Lenders lend money to get more money, be it at the micro farm level involving a distraught farmer or at the global level where the borrowers represent large segments of the world’s working poor.
Will the IMF-WB meeting next week gift the world with a new and different debt story?