Of the Bretton Woods institutions, the IMF particularly has long been regarded as a financial villain by developing countries who chaff under its various painful strategies. But is it time to re-evaluate its role in the changing global configuration? Report by Peter Guest.
Malawi’s economic problems came to a head two years after the financial crisis had begun in the West. By 2011, street protests against shortages of fuel and electricity had turned violent. The country’s then-President, Bingu wa Mutharika, resisted the advice of donors, refusing to allow the currency to devalue and putting in place capital controls. Once hailed for the economic turnaround of his country, Mutharika’s second term saw the current account dwindle and donors desert him.
Three years later, Malawi is hauling itself back on track. The incoming government – headed by the former President’s brother – has devalued the kwacha, announced that it will adopt a flexible exchange rate regime and undertake cuts to public spending to address its chronic fiscal deficit.
Its reward was a $156m loan from the International Monetary Fund under the IMF’s Extended Credit Facility in July 2012. It was the IMF performing a function honed over decades, lending to support fiscal and monetary reforms, supported by an absolute belief in the mechanisms by which fiscal crises can be resolved.
The financial crisis breathed new life into the IMF, creating current account problems in developed and developing countries across the world. The Fund has launched more than 30 new arrangements in the past four years, becoming a major player in the bailouts of Eurozone economies. It has developed six new instruments, three each for developing and developed countries.
At the same time, it has actively tried to change the tone of its engagement with its clients, sending out the message that it no longer plays the role of global financial policeman in the hope of shedding its reputation for dictating conditions and sticking to a dogma that has been unchanged since its foundation. Its critics, however, say it is the same old Fund.
“I think it’s really timely to ask whether the IMF has really learned the lessons of the continued criticisms of its role, and whether its presentation of a more emollient and open stance has really been consistent with the 33 new arrangements its signed up to since 2010?” says Sargon Nissan, programme manager for the IMF at the Bretton Woods Project, which monitors the activities of the Fund and the World Bank.
“It doesn’t seem to me that the IMF has had fundamentally a rethink in its historic approaches, which have been at heart forcing pro-cyclical approaches into the teeth of downturns and crises.”