Financial Resource

This credit is also available for a period of 3.25 to 5 years.

1971 was an important year in the history of the world’s financial markets. The Bretton Woods Agreements were cancelled but instead of pulling the carpet under the proverbial legs of the IMF – it served to strengthen its position. Under the Smithsonian Agreement, it was put in charge of maintaining the central exchange rates (though inside much wider bands). A committee of 20 members was set up to agree on a new world monetary system (known by its unfortunate acronym, CRIMS). Its recommendations led to the creation of the EFF (extended Financing Facility) which provided, for the first time, MEDIUM term assistance to members with BOP difficulties which resulted from structural or macro-economic (rather than conjectural) economic changes. It served to support medium term (3 years) programs. In other respects, it is a replica of the SBA, except that that the repayment (=the repurchase, in IMF jargon) is in 4.5-10 years.

The 70s witnessed a proliferation of multilateral assistance programs. The IMF set up the SA (Subsidy Account) which assisted members to overcome the two destructive oil price shocks. An oil facility was formed to ameliorate the reverberating economic shock waves. A Trust Fund (TF) extended BOP assistance to developing member countries, utilizing the profits from gold sales. To top all these, an SFF (Supplementary Financing Facility) was established.

During the 1980s, the IMF had a growing role in various adjustment processes and in the financing of payments imbalances. It began to use a basket of 5 major currencies. It began to borrow funds for its purposes – the contributions did not meet its expanding roles.

It got involved in the Latin American Debt Crisis – namely, in problems of debt servicing. It is to this period that we can trace the emergence of the New IMF: invigorated, powerful, omnipresent, omniscient, mildly threatening – the monetary police of the global economic scene.

The SAF (Structural Adjustment Facility) was created. Its role was to provide BOP assistance on concessional terms to low income, developing countries (Macedonia benefited from its successor, ESAF). Five years later, following the now unjustly infamous Louvre Accord which dealt with the stabilization of exchange rates), it was extended to become ESAF (Extended Structural Adjustment Facility). The idea was to support low income members which undertake a strong 3-year macroeconomic and structural program intended to improve their BOP and to foster growth – providing that they are enduring protracted BOP problems. ESAF loans finance 3 year programs with a subsidized symbolic interest rate of 0.5% per annum. The country has 5 years grace and the loan matures in 10 years. The economic assessment of the country is assessed quarterly and biannually. Macedonia is only one of 79 countries eligible to receive ESAF funds.

In 1989, the IMF started linking support for debt reduction strategies of member countries to sustained medium term adjustment programs with strong elements of structural reforms and with access to IMF resources for the express purposes of retiring old debts, reducing outstanding borrowing from foreign sources or otherwise servicing debt without resorting to rescheduling it. To these ends, the IMF created the STF (Systemic Transformation Facility – also used by Macedonia). It was a temporary outfit which expired in April 1995. It provided financial assistance to countries which faced BOP difficulties which arose from a transformation (transition) from planned economies to market ones. Only countries with what were judged by the IMF to have been severe disruptions in trade and payments arrangements benefited from it. It had to be repaid in 4.5-10 years.

In 1994, the Madrid Declaration set different goals for different varieties of economies. Industrial economies were supposed to emphasize sustained growth, reduction in unemployment and the prevention of a resurgence of by now subdued inflation. Developing countries were allocated the role of extending their growth. Countries in transition had to engage in bold stabilization and reform to win the Fund’s approval. A new category was created, in the best of acronym tradition: HIPCs (Heavily Indebted Poor Countries). In 1997 New Arrangements to Borrow (NAB) were set in motion. They became the first and principal recourse in case that IMF supplementary resources were needed. No one imagined how quickly these would be exhausted and how far sighted these arrangement have proven to be. No one predicted the area either: Southeast Asia.

Despite these momentous structural changes in the ways in which the IMF extends its assistance, the details of the decision making processes have not been altered for more than half a century. The IMF has a Board of Governors. It includes 1 Governor (plus 1 Alternative Governor) from every member country (normally, the Minister of Finance or the Governor of the Central Bank of that member). They meet annually (in the autumn) and coordinate their meeting with that of the World Bank.

The Board of Governors oversees the operation of a Board of Executive Directors which looks after the mundane, daily business. It is composed of the Managing Director (Michel Camdessus from 1987) as the Chairman of the Board and 24 Executive Directors appointed or elected by big members or groups of members. There is also an Interim Committee of the International Monetary System.

The members’ voting rights are determined by their quota which (as we said) is determined by their contributions and by their needs. The USA is the biggest gun, followed by Germany, Japan, France and the UK.

There is little dispute that the IMF is a big, indispensable, success. Without it the world monetary system would have entered phases of contraction much more readily. Without the assistance that it extends and the bitter medicines that it administers – many countries would have been in an even worse predicament than they are already. It imposes monetary and fiscal discipline, it forces governments to plan and think, it imposes painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters (or citizens) endure. It is very useful. Lately, it lends credibility to countries and manages crisis situations (though still not very skilfully).

This scapegoat role constitutes the basis for the first criticism. People the world over tend to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a market economy could have provided a swifter and more resolute adjustment – the diversion of scarce human and financial resources to negotiating with the IMF seems to prolong the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful – the credit goes to the politicians, if failing – the IMF is always to blame. Rage and other negative feeling which would have normally brought about real, transparent, corruption-free, efficient market economy are vented and deflected. The IMF money encourages corrupt and inefficient spending because it cannot really be controlled and monitored (at least not on a real time basis). Also, the more resources governments have – the more will be lost to corruption and inefficiency. Zimbabwe is a case in point: following a dispute regarding an austerity package dictated by the IMF (the government did not feel like cutting government spending to that extent) – the country was cut off from IMF funding. The results were surprising: with less financing from the IMF (and as a result – from donor countries, as well) – the government was forced to rationalize and to restrict its spending. The IMF would not have achieved these results because its control mechanisms are flawed: they rely to heavily on local, official input and they are remote (from Washington). They are also underfunded.

Despite these shortcomings, the IMF assumed two roles which were not historically identified with it. It became a country credit risk rating agency. The absence of an IMF seal of approval could – and usually does – mean financial suffocation. No banks or donor countries will extend credit to a country lacking the IMF’s endorsement. On the other hand, as authority (to rate) is shifted – so does responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors. This encourages irresponsible lending and investments (why worry, the IMF will bail me out in case of default). This is the “Moral Hazard”: the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler – the losses to the IMF. This does not encourage prudence or discipline.

The IMF is too restricted both in its ability to operate and in its ability to conceptualize and to innovate. It is too stale: a scroll in the age of the video clip. It, therefore, resorts to prescribing the same medicine of austerity to all the country patients which are suffering from a myriad of economic diseases. No one would call a doctor who uniformly administers penicillin – a good doctor and, yet, this, exactly is what the IMF is doing. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF’s ability to influence the financial markets in an age of globalization is dubious (to use a gross understatement – the daily turnover in the foreign exchange markets alone is 6 times the total equity of this organization). The result is fiascos like South Korea where a 60 billion USD aid package was consumed in days without providing any discernible betterment of the economic situation. More and more, the IMF looks anachronistic (not to say archaic)

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