IMF gold windfall helps poor countries now but won’t break cycle of debt
By subsidising cheaper loans to low-income countries, the IMF will keep them trapped by debt repayments for years
The countries that run the International Monetary Fund (IMF) have decided to spend a $2.7bn (£1.7bn) windfall on subsidising cheaper loans to low-income countries. This will represent a small financial benefit for countries taking such loans, but leaves unchallenged what such loans and debt exist to do.
In the mid-2000s, the IMF faced a financial crisis as middle-income countries such as Argentina and Brazil paid off their debts to the institution. The fund’s $1bn costs are paid for by the interest it charges on loans, and its income dried up as countries got off lending programmes, scarred by two decades of austerity and liberalisation.
The IMF decided to sell off some gold, invest the money earned, and use the proceeds to run the institution. Then the financial crisis hit; a crisis the IMF had not only systematically failed to warn of but had helped to precipitate through its praise of light-touch regulation. Lending by the IMF has ballooned along with its income: this year a profit of $2.2bn has been made on loans to countries including Pakistan, Jamaica, Ireland and Greece. And with gold prices rising, far more money than predicted came in from the sell-off, leaving a $2.7bn windfall.
The IMF charges little or no interest on its loans to low-income countries; those with an income per person of less than £650 a year. Historically, it has been subsidised to do so by “aid” donations from wealthier countries. The IMF board’s decision to use the gold windfall to pay for these low interest rates for the foreseeable future means low-income countries will continue to pay 1% less in interest than they otherwise would, a saving of £40m a year across them all. It also leaves IMF loans funded and in place for years to come.
The IMF was created at the end of the second world war to provide temporary loans to countries that were facing a “liquidity crisis” – a short-term inability to pay debts and buy imports.This month, Germany’s Bundesbank complained that the IMF in Europe is straying from this liquidity role to one of ongoing lending. But this has been happening for three decades.
In 1982, Mexico defaulted on its huge debts from reckless lending by banks awash with money in the 1970s because of high oil prices. Faced with the prospect of US, Japanese and British banks going bust, the IMF stepped in with bailout loans, enabling the continued payment of the debts in return for austerity and liberalisation. The pattern was repeated across Latin America and Africa for two decades, a time when economies stagnated and poverty rapidly increased. In Africa, the number of those living in extreme poverty rose from 205 million in 1981 to 330 million in 1993.
While IMF lending maintained a debt crisis, the reckless lenders benefited from getting money back. The same pattern is being repeated in Europe today as German, French and British banks are repaid reckless loans, while Greece, Ireland and Portugal are stuck in economic collapse, depression and rising poverty.
Bailing out reckless lenders contributes to the pattern of debt crises we have seen for the past 30 years; bank risk is reduced by the knowledge that the IMF is ready to step in to honour repayments. It continues in low-income countries. The IMF is due to lend Bangladesh $1bn over the next three years, money that will be used to help meet debt payments of $2bn a year; a huge 15% of government revenue.
At the same time, IMF loans continue to impose particular economic policies on countries that borrow. Bangladesh is having to increase VAT, including on essentials such as rice, lentils and cooking oil, while cutting trade taxes, which could undermine small businesses and worsen the country’s balance of payments, leading to more debts.
In other low-income countries, IMF loans no longer look like debt bailouts. Many countries have seen their debt payments fall significantly in recent years, partly due to $130bn of debt cancellation by the IMF, World Bank and governments in response to the jubilee campaign for debt repudiation or cancellation. Yet many of these countries continue to borrow from the IMF, and for the long term. Burkina Faso, Malawi and Sierra Leone are among those that have been borrowing for more than a decade.
In some countries, the IMF is effectively acting as a general development lender. IMF staff justify this by saying the loans can be used for productive investments, increasing exports, and making a country less vulnerable to crises. That may be true, but loans might also be used, for example, to pay for consumption of luxury imports by elites – leaving the entire country with a debt to be paid.
The IMF accounts for 15% of all lending to low-income countries, and the World Bank is responsible for a further 30%. Debts in many countries are increasing again, with repayments by impoverished countries predicted to rise by one-third between 2010 and 2014.
One indicator of how rapidly debts are being created is the current account deficit. If imports are higher than exports, this has to be paid for by borrowing or other investments that create financial obligations. For the 15 low-income countries with which the IMF says it has had “long-term engagement” over the past decade, current account deficits have been increasing every year, from 6% of GDP in 2002 to 15% in 2011. This could be sowing the seeds of future debt and financial crises.
Saving low-income countries £40m a year is a positive result. But it will be a drop in the ocean if continued IMF lending contributes to more devastating debt crises in the future.