The IMF has strongly denied that its mission to boost its status as global lender has undermined policy reform efforts in borrowing nations, amid growing criticism of Fund’s new flexible lending policies from hawkish observers.
“This crisis is different. This is the crisis where the whole world is in a recession and we need to tailor programmes accordingly,” Lorenzo Giorgianni, chief of emerging markets division at the IMF’s strategy, policy, and review department, said in an interview with Emerging Markets in Istanbul yesterday.
The IMF earlier this year startled markets by unexpectedly sanctioning large fiscal deficits in Ukraine and Hungary, and by expanding its large programme for Pakistan.
When the IMF’s programme for Ukraine was launched last year, the Fund recommended a balanced budget, but then sanctioned a deficit of 4% of GDP. Now it has agreed to a deficit of 6% for general budgetary purposes plus 2.6% for state-owned energy company Naftogaz Ukrainy.
And after torturous bargaining with Latvia, the Fund also relaxed its fiscal criteria during the summer.
Giorgianni said the structure of IMF lending has been biased toward fiscal policy rather than monetary support, due to the collapse of private sector economic activity in the teeth of the global slump.
“Monetary policy has been relatively ineffective, as banking systems had problems across the globe. So there has been a greater emphasis on fiscal policy to carry the load [of policy-led economic stimulus],” Giorgianni said.
In November last year, the IMF approved a $7.6 billion stand-by arrangement with Pakistan that was upsized by an additional $3.2 billion to fund social programmes. However, observers argue that the country is relaxing its fiscal policies this year, and interest rates remain too low, while the IMF has not imposed structural reforms necessary for macro-economic adjustment.
Ashfaque Khan, a former economic advisor to the Pakistan finance ministry (1998-2009), told Emerging Markets: “It is strange that the IMF has allowed its resources to be used for budgetary reasons instead of balance-of-payments support. This is a major departure from the past – it is as if the IMF has changed its religion.”
He added: “The government has become impatient while the IMF has also forgotten its own lesson of a sound fiscal position, so vital for achieving macroeconomic stability.” The country’s fiscal deficit for the 2008-09 fiscal year stands at 5.8%, exceeding the government target by 0.9%.
Giorgianni said the Fund has learned lessons from the 1997 Asia crisis, when it called for fiscal austerity and interest rate hikes to stabilize currencies and reduce import demand to correct current account balances. These policies were criticized for triggering a self-reinforcing contraction that further destabilized the region and has stigmatised the lender of last of resort in the region.
The Fund’s new approach had garnered goodwill among borrowers that has “brought more [government] ownership in IMF programmes and so performance [observance of IMF criteria] has been better than the past”, Giorgianni said.
He denied that the IMF is giving into government pressure to continue spending, which threatens to delay the necessary policy adjustment. “There are some that say the best time to make reforms is in the midst of crisis, but this could be more costly to society. [...] Reforms need to be more gradual.”