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IMF conditionalities are vanishing

Jean-Pierre Dumas

February 3, 2022

We have the feeling that the IMF is more and more evolving as a super NGO, of course, we exaggerate, let’s say that the Fund is morphing into a traditional aid agency confusing sometimes loans with grants. Before, we could read on the IMF site, stimulative papers on fiscal, debt, interest-rate policies; today we are blessed with an article a day from Ms. Georgieva about climate change, women’s empowerment, and ideological words such as inclusive future, social contract, better lives, gender inequality, social isolation, etc. If you open the IMF site: -the exchange (pictured), you have no less than six conversations of Ms. Georgieva about “a better future”). If we don’t make good literature with “bons sentiments” (A. Gide) the same thing may apply for good economic policy.

The conditionalities which were the raison d’être of the IMF are slowly vanishing. The Rapid Financing Instrument, a new lending facility set up by the Fund to deal with the crisis, is practically without strings attached. "The weak", as often, won their case, why to impose austerity to a sovereign nation? We all know the argument, we also know the response, if you (the countries) are in trouble and have no more foreign exchange to import or service your foreign debt, this is due to excess (public) expenditure source of your external deficit, so please start to put your house in order if you want to have sustainable growth. In addition, the IMF is (was) asking some structural reforms to reduce obstacles to growth.

The FT article regarding Argentina's conditionalities shows that the IMF conditionalities for recycling the huge Argentina’s Government debt vis-à-vis the IMF ($44.5bn) are minimal. No conditionalities regarding price distortions, exchange rate overvaluation, and unsustainable subsidies to maintain public-sector tariffs.

The traditional argument of the populists consists of saying that the IMF is an unbearable hindrance on their sovereignty, freedom and is against the poor (because all public spendings are, by definition, for poverty alleviation, (this is an implicit argument used everywhere).

The populists’ arguments are wrong, but if IMF is more and more reluctant to impose conditionalities, this is not only because it is tired of listening permanent criticisms against IMF considered as the bad boy (now the bad girl), but this is also perhaps because populists may have a point, they don’t mention. There is a double standard, you (IMF) criticize us for having a general government deficit amounting to 8.6% of GDP in 2020, but look at France 9% in 2020 and 2021, look at the US, 15% of GDP in 2020, 11% in 2021, and look at the UK, 13% in 2020 and 12% in 2021. Our deficits and debts are not higher than yours and the IMF is silent regarding these countries. This is not new, poor, and emerging countries are more fragile than rich countries; poor countries have a lower tolerance to high debt than rich ones (they borrow in dollars). But the quantitative easing policy practiced by rich countries has allowed them to live without consequences (up to now) with high public deficits without inflation (things are changing). Therefore, poor countries may have some ground to say: is it fair that, you, rich countries, can go into debt up to the nose and we poor countries are obliged to adjust under the IMF’s iron rules?

IMF seems to have lost its legitimacy because of the laxity of rich countries (which own it). Rich countries don’t apply to themselves what they request from poor countries (France is overspending and does not envisage reducing public expenditure, it has capped the electricity tariff to four percent increase whereas electricity prices will increase by at least 40%, EdF (a public-owned company) will finance this subsidy). Good governance, public sector restraint, price equilibrium, tax neutrality, no subsidies to public entities should not be limited to poor countries alone but to everybody, because economic laws may start to apply to all even to countries which borrow in their own currencies.

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