brand logo

From heartless devil to sympathetic friend

26 Jun 2022

  • How the IMF has changed its strategy over the years
While debates still continue on whether austerity measures and required fiscal budget tightening of the International Monetary Fund (IMF) differ depending on the respective borrower country’s level of allegiance to the Western world, in recent years, particularly after the financial crisis of 2008-2009, there is a question whether the Fund is shifting away from conditioning fiscal consolidation and practices pertaining to austerity that reportedly did not take the poorest into consideration.    IMF was indeed a heartless devil   The IMF requires no introduction for us Sri Lankans. Since 1965, the country has turned towards the IMF for financial assistance 16 times – notwithstanding the current discussions that are taking place for a full programme – like addicts often returning to rehabilitation centres. Reaching out to the IMF soon after the expiry of the previous arrangement has become a toxic trait of consecutive governments of Sri Lanka, but what will be discussed today is rather the shift in the IMF approach towards distressed countries over the years. The question is not whether the IMF shifted away from its established practices but the extent to which they shifted away.  A working paper titled ‘IMF Austerity Since the Global Financial Crisis: New Data, Same Trend, and Similar Determinants,’ by Dr. Rebecca Ray, Dr. Kevin P. Gallagher, and Dr. William N. Kring perfectly sums up the answer to this question. Ray is a Senior Academic Researcher at Global Economic Governance Initiative, Gallagher is a professor of global development policy at Boston University’s Frederick S. Pardee School of Global Studies, and Kring is the Assistant Director of the Global Development Policy Centre, a university-wide centre in partnership with the Frederick S. Pardee School for Global Studies.   Another working paper titled ‘Poverty, Inequality, and the International Monetary Fund: How Austerity Hurts the Poor and Widens Inequality,’ authored by Thomas Stubbs, Alexander Kentikelenis, Rebecca Ray, and Kevin P. Gallagher will also be referred to throughout this article.  The papers highlight that austerity measures as imposed by the IMF were not evenly distributed amongst all borrowing countries. Despite taking into account the respective borrower country’s economic situation, the authors reveal that the treatment depended on the respective country’s foreign economic and diplomatic relationships. The strongest factor that influenced austerity measures is a country’s diplomatic relationship with Western Europe, measured as its average voting alignment with Germany, the UK, and France at the UN General Assembly (UNGA). Borrowers’ trade relationship with Western Europe was also associated with significantly less austerity.  They add that the track record of IMF-mandated austerity has not lived up to its promise – social spending floors are only implemented around half the time and have not protected social spending from austerity measures. The impact of these austerity measures ultimately falls on the shoulders of the most vulnerable segments in the community. The working papers highlight a statistically significant negative effect of fiscal adjustment on the income share of the bottom 80% of the population of borrowing countries. “In other words, IMF-required austerity is significantly associated with the highest earners receiving more at the expense of the bottom 80%. The biggest losses are accrued by middle-class earners, in deciles six through eight, plausibly a product of wage, employment, and pension cuts for civil servants,” the second working paper notes.  Needless to say that these results often left a serious impact on the poorest of the community.    Covid-19 made the IMF more sympathetic   The Covid-19 pandemic that began impacting global economies in early 2020 has ravaged poorer regions and some of these regions witnessed their economic growth shrinking by a significant amount.  The papers highlight that amidst the global economic instability, international investors fled developing economies, before returning after vaccines were announced, creating significant exchange rate instability, which can make a country’s dollar-denominated debt obligations unsustainable, even if they were within a normal range before the pandemic. It can also wreak havoc on a country’s balance of payments, creating just the type of international financial instability the IMF was created to address. “As the IMF responds to these crises, encouraging signs have emerged that the Fund may be treating this crisis with special care. The GDP Center’s IMF Covid-19 Recovery Index shows that IMF arrangements in 2020 and 2021 have begun to directly target maintaining or increasing health spending, for example, though rarely in binding ways.” However, the papers add that broader austerity matters as well.  “The IMF would be well served to take its recent progress and expand it to apply to austerity generally, or at the very least, work to ensure that required austerity does not worsen inequality and poverty in borrowing nations as they work to recover from the Covid-19 crisis.”   A new approach towards Sri Lanka   It is apparent that the IMF’s austerity measures have had a profound impact on vulnerable communities and that the IMF is shifting away from this approach. This is supported by the fact that the Fund is now focusing mainly on creating social safety nets for the poorest before resorting to heavy austerity measures.  Social safety nets (or social assistance) are defined as “noncontributory measures designed to provide regular and predictable support to poor and vulnerable people”. They can include measures such as cash transfers, school meals, in-kind transfers (such as targeted food assistance), and public work programmes.  The IMF Article IV Report on Sri Lanka suggests that the Government should implement safety net mechanisms to protect the vulnerable in the community, and one state ministry is proceeding with two such mechanisms that have already been planned.   The IMF Article IV Staff Report on Sri Lanka that was issued recently states that despite the ongoing economic recovery, the country faces mounting challenges, including public debt that has risen to unsustainable levels, low international reserves, and persistently large financing needs in the coming years.   Against this backdrop, IMF Directors stressed the urgency of implementing a credible and coherent strategy to restore macroeconomic stability and debt sustainability, while protecting vulnerable groups and reducing poverty through strengthened, well-targeted social safety nets.  “Social safety nets should be strengthened, by increasing spending, widening coverage, and improving targeting, to mitigate the adverse impacts of macroeconomic adjustment on vulnerable groups,” the IMF Directors recommend.  The report highlights that social safety nets have been used to mitigate the impact on the poor and vulnerable during the pandemic; the 2022 Budget made new provisions for social assistance, and the January 2022 relief package raised the transfer amount for recipients of Samurdhi cash transfers.   The IMF has now resorted to a more humane approach in terms of implementation of austerity measures, which the Fund is well-known for. Even though the success of this new shift is yet to be determined, the IMF has finally taken into consideration those who will take on the burden of austerity.  The impact of Sri Lanka’s ongoing financial arrangement with the IMF and subsequent austerity is something the country will be able to witness in the coming months.   


More News..