The IMF to the Rescue – Masoud Mostajabi

As a consequence of the Bretton Woods Conference in July of 1944, the International Monetary Fund (IMF) has evolved into an institution that assumes some of the basic functions of a world central bank without the need for a debate over a global currency or political union. Many critics charge that the IMF is an ineffective Band-Aid, a rescuer of undeserving bankers, its programs as imprudent or wasteful, and that countries and investors may take excess risks knowing the IMF will ‘come to the rescue’. However, in cases in which the IMF has successfully applied its programs and maintained a healthy relationship with the government have been applied, large-scale successes have been witnessed. Here I will look at the process of seeking IMF help, two cases in which the IMF brought about this success, and the IMF’s importance to the dynamic global economy.

When a country requests the International Monetary Fund’s help in a balance of payments crisis, the IMF’s management and staff conduct negotiations with that country’s economic authorities in order to establish policies its government shall implement in overcoming the crisis and enabling the resumption of its economic growth. These policies, whether budgetary, monetary, exchange rate, etc., are outlined or quantified in a letter of intent from the economic authorities to the Managing Director, referred to as IMF “conditionality.” With that, the economic authorities have requested a loan from the IMF, often called a Stand-By Agreement. Accompanied by a report and recommendation by IMF staff, once approved, the IMF loan is normally disbursed in installments in a short period (1-2 years), as long as the conditions described are implemented.

The IMF disburses foreign currencies to the requesting country’s Central Bank in order to increase its gross of foreign reserve holdings. These larger reserves allow for its population to spend more on domestic and foreign goods and services and thus lessens the downturn in economic activity and easing the hardships of a crisis. There have been numerous successful cases, and two examined here (Jordan and South Korea), of country’s looking to the IMF as the lender of last resort. The IMF-sponsored successes within Jordan and South Korea have in being able to weather the negative impacts and repercussions of their regional and world affairs, while continually achieving comparatively high economic growth rates, are cases worthy of evaluation.

The small Middle Eastern country of Jordan is one example of how the IMF can foster a strong, stable, and productive member of the global economy after a financial crisis. According to Tsikata and Kayizzi-Mugerwa, it was in the late 1980s that Jordan’s structural weaknesses in public finance and balance of payments were exposed as unemployment reached nearly 35 percent and external debt had soared. In 1989, Jordan sought IMF help to facilitate orderly external financial relations and turn back its tapering economy. After nearly 15 years of continuous relations with the IMF, the steadfast implementation of reforms has strengthened Jordan’s economic foundation according to the IMF and Jordan’s government has decided to maintain close relations with the IMF in so-called “post-program monitoring” and technical assistance.

The second example is the case of South Korea in the late 1990s. According to Kim Kihwan, with the economic downturn of other countries in the so-called Asian Financial Crisis and markets’ worries about too much foreign debt and too little reserves in South Korea, the country sought financial assistance from the IMF. The IMF program would provide a catalyst for financial and corporate restructuring whilst the foreign exchange market was stabilized. Within a year’s time, the downturn had begun to reverse, interest rates climbed back to pre-crisis levels, and foreign exchange reserves exceeded $50 billion, within three years at approximately $100 billion. By the fourth year, with the appreciation of the Korean won, all outstanding IMF loans were repaid and the IMF-supported program had ended.

Over its existence, the IMF has lent several hundred billion US dollars cumulatively with the vast majority of these loans being repaid, except for certain cases (Sudan, Somalia, etc.). Nearly $7 billion has been waived through debt relief granted to the poorest states by the IMF under the Heavily Indebted Poor Countries Initiative (HIPC).  With that said, would the world today seek an IMF-like institution if it did not already exist? As outlooks for the world economy never seem to provide unerring reports, the answer must be yes. The turbulence found in the global financial markets demonstrate why the world needs a place like the IMF as no organization has the resource capabilities and technical expertise provided by this lender of last resort in buffering extreme economic turmoil during market crisis.


One thought on “The IMF to the Rescue – Masoud Mostajabi

  1. The IMF’s impending loan agreement with Egypt shows that the IMF has not learned its lesson on the dangers of conditionality. The IMF package to Egypt includes some conditionalities like budget cuts but there is also an unofficial conditionality that the IMF wants to see happen before the package is finalized: a devaluation of the Egyptian pound. Currency devaluation is not a new conditionality but it doesn’t make sense for Egypt. For certain, the Egyptian pound is artificially overvalued and the theory is that a cheaper currency will boost exports, bringing in the foreign currency that Egypt desperately needs.

    However, currency devaluation will not lead to greater exports in Egypt’s case. Egypt is already exporting below is quota agreements with the EU in several sectors, showing an efficiency problem not a market demand problem. One of its major exports, tourism, won’t be affected by a cheaper Egyptian Pound when the greater suppressant in the industry is Egypt’s security situation. Egypt devaluing its currency, will bring huge inflation to a population that is already experiencing 20% inflation on basic food prices, according to the Tahrir Institute. Conditionalities are supposed to create structural changes in an economy that will help get its debt problem back under control, not send people further into poverty without national benefit. For all its talk of reform and increased transparency under new leadership, the IMF also skipped the step of in-country consultations with the public, something that is supposed to a key outcome of its new understanding.

    The IMF hasn’t abandoned its one-size-fits-all methodology despite the rhetoric. Successes in places like Jordan and South Korea obscure flaws in the IMF leadership’s logic and supports an approach that will never be universally effective. The IMF is supposed to serve as a resource to any country in crisis, not just the ones that will react well to pre-determined conditions.


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