By Sir Ronald Sanders
In the wake of the economic damage done by the effects of the COVID-19 pandemic, countries in every continent of the world have turned to the International Monetary Fund (IMF) for assistance.
It is right that they have done so. The IMF exists to provide economic and financial support to countries when other options have been extinguished. The pandemic brought countries to that situation in rapid time, particularly tourism dependent countries which were the hardest hit.
In some countries, there is an ideological resentment of the IMF. That resentment is based on past harsh conditionalities that the Fund included in the terms of its loans to countries already in desperate straits. That resentment should be re-evaluated. IMF conditionalities still exist, but they are more geared to recognising the breathing space governments require to get their countries’ economies performing at an optimum level. The Fund wants to be repaid, so that, in turn, it can pay back the banks, governments and institutions from which it borrows to supplement its lending resources.
While the main source for IMF loans on non-concessional terms are provided by member countries, through their quota payments, the Fund also borrows money that it lends. Of the IMF’s current total resources for lending, amounting to about US$1 trillion, a significant portion is money that must be repaid.
If the IMF fails to service its loans, the entire world will lose an extremely important pillar of the global financial architecture, resulting in infectious economic instability and, eventually, political chaos and civil strife.
Consequently, like any lender, the IMF has to make sure that borrowing countries will be able to repay. It sets terms – called conditionalities – to ensure that the best use is made by borrowers of the money they are advanced, and that loans can be repaid.
Presently, IMF loans are on more generous terms than they used to be. For instance, financing for approved medium term growth and development strategies could be secured with a repayment period of 14 years, a 4-year moratorium and an interest rate of 1 per cent. Loans of this nature are not available from any other source.
Of course, negotiating the best conditionalities is important. This is not the time to lay-off public sector workers, especially in countries where employment in the private sector has declined disastrously because of the COVID-19 pandemic. The IMF Executive Board and Management are aware of that and have adopted policies that are more open to support for vulnerable groups than they were in the past.
What is more, approval by the IMF to fund a programme opens the door to borrowing from other financial institutions, and to rescheduling debt with agencies such as the Paris Club. These institutions, including the Caribbean Development Bank, regard the imprimatur of the IMF as crucial in determining a country’s creditworthiness.
In the present global economic crisis, 84 countries have already taken advantage of the IMF’s lending to the tune of US$109,594.38 million. Of those countries, eight are CARICOM states, namely: Bahamas, Barbados, Dominica, Grenada, Haiti, Jamaica, St Lucia and St Vincent and the Grenadines which have borrowed US$842 million. Eleven Latin American countries, including Honduras, Costa Rica, Panama, Peru, Ecuador and Nicaragua, have borrowed US$66,677.46 million.
Those, who argue against the IMF on ideological grounds, should have alternative sources of financing to propose. Either they must show a clear path to the capacity of their countries to recover and prosper from renewed and sustainable economic activity, or they must identify cheaper sources of borrowing with less strenuous terms. If they cannot identify such possibilities in a realistic way, then the only alternative to borrowing from the IMF is to leave their economies to languish, running out of money and failing to provide goods and services that their people expect.
The current economic conditions, across the CARICOM states except for Guyana, and possibly St Kitts-Nevis and Trinidad and Tobago, require pragmatism and practicality in recognising that working with the IMF has value.
There is no shame in going to the IMF to borrow in the current climate. It is a necessity, particularly when other options have dried-up. Further, the IMF is fulfilling the role for which it was created – to lend when other options are closed. The anti-IMF ideological argument is one that cuts off your nose to spite your face. It makes little sense.
In the current crisis, political parties and others that try to discredit governments because they opt to borrow from the IMF, ignore two salient points. First, governments are not now constrained to approach the IMF because of any failed policies they pursued; they approach the IMF because the devastating effects of the pandemic forced them there. And, second, the IMF is a lender of last resort. Governments contract with the IMF because the economic circumstances of their countries are such that they must borrow to sustain their populations, and, in those conditions, where better than the institution that provides the cheapest lending.