Borrowing from the International Monetary Fund: fanning or extinguishing the fire?
August 16, 2020 0

Are the conditions placed by the International Monetary Fund in favor of the borrowing countries or quite the contrary?

The International Monetary Fund was established in 1944 after the Second World War, with the aim of ensuring international cooperation in financial matters, ensuring stability in the exchange rate and developing international liquidity.

The International Monetary Fund has provided financial assistance to different countries in multiple ways since its inception to the present day. The most famous forms of its assistance are borrowing, as well as rapid financing in times of crisis, and financial support for low-income countries.

Countries wishing to borrow from the International Monetary Fund are required to submit to some conditions that affect countries’ financial policies, after an agreement between the IMF’s team of experts and country representatives. These conditions are included in some of the similar procedures that have been imposed on different countries, including future conditions before borrowing, such as ensuring a balance between state financing and revenue and canceling policies for fixing prices, as well as the conditions applied after receiving the amount from the fund. This includes setting the maximum loan percentage and the government funding ratio, and setting a minimum for international reserves, local taxes, and the social support ratio. These conditions aim to improve the economic conditions of the borrowing countries and thus ensure their ability to pay off debts[1].

The debates revolved around the validity of the conditions that affect the financial policies of borrowing countries and their effectiveness in improving economic conditions. There are arguments supporting borrowing from the Fund according to its terms and arguments opposing to this notion.

Arguments supporting the motion

Those who support these conditions have several justifications. The most important of which can be summarized into four basic points: economic recovery, the ability to pay off debts, improving the state’s conditions, and relying on the correct standards in dealing with financial policies.

  1. Economic recovery

The primary goal of borrowing is to get out of economic crises which is the first step to implementing that economic recovery. As long as the state is not able to drive economic growth and reform the economic situation, it will remain in the circle of crises, regardless of the funds spent to finance the needs of citizens.

From this standpoint, the importance of the conditions that the Fund places on countries appears. When the government reduces its budget by striking a balance between its expenditures and its financial capacity, some groups in the country will be affected and some companies and institutions will collapse, but this step is very important to stop the crises and start economic recovery. Privatization of some institutions and fields is also an important step to improve performance while at the same time reducing the government’s budget.

The State of Mexico passed through the worst economic situation in 1998, but it was still committed to planned fiscal policies with the IMF, and the country succeeded in emerging from the crisis and achieved economic recovery and became one of the most developed countries in 1999 compared to other countries that suffered from the 1997-1998 crisis[2].

  1. Debt – carrying capacity

It is known that the capacity of financial support by the International Monetary Fund is determined according to the proportion of major countries’ spending and the number of countries that need financing aid and borrowing. They are many and increasing, especially in times of crisis. Therefore, the fund must ensure that the borrowing countries are able to pay off the debts. Otherwise, the Fund’s ability to continue financing will deteriorate with the collapse of the borrowing countries’ economies.

Upon compliance with these conditions, the state can provide money for future repayment, and the fund can also know how serious the state is in taking difficult decisions to improve its economic conditions.

  1. Improving the state’s conditions

The economy is a fundamental factor in the prosperity of the country, as economic stability reflects the high level of social life and its deterioration leads to chaos and the fall of various fields in the country.

Upon compliance with the conditions, the state will be able to preserve the pillars of the economy, including financial institutions, basic services, internal and external reserves, and the exchange rate. Citizens will live under pressure when income is low and prices are high, but the government is still able to ensure the availability of basic services and protect the state from chaos.

Conversely, if the government continues spending and not adhering to the conditions, the resources will gradually dwindle and the government’s ability to provide basic needs will be compromised, and then social and political chaos will ensue. It would be difficult for the state to overcome the problem if it reaches this point.

The fastest country to overcome the 1997-1998 Asian economic crisis was South Korea. The country began borrowing from the Fund around 58 billion dollars at the end of 1997 and adhered to a strict fiscal policy, then the value of its currency rose and foreign investments returned in early 1998[3].

  1. Relying on the right criteria in dealing with financial policies

There are many factors that influence government decisions, regardless of the political systems. A government may make harmful decisions for the state or be hesitant in taking difficult decisions just to make people contented. But in reality, this is not a solution to the economic crisis, but rather an inflammation of the problem. Therefore, the existence of the exact conditions from the international organization is considered important to eliminate economic problems in addition to external financing. When the fund set these conditions, they studied the damages and benefits expected to the particular country in a professional manner based on its previous experience with other countries and the situation of the borrowing country.

Arguments opposing the motion

Those who do not support the conditions of borrowing from the International Monetary Fund support their argument by five points: the increase in economic deterioration, civil unrest, the continued dependence on the Fund, demise of democratic systems and lack of control at the root of the problem.

  1. Increased economic deterioration

Some borrowing countries experience further economic decline. Although this effect is expected for a short period, it is a major problem, especially for countries that still suffer from crises.

If the country was about to fall before borrowing, as unemployment increased, development projects decreased, markets disrupted, and then a policy is imposed on it such as reducing expenditures on enterprises, privatizing basic services and tightening borrowing procedures from banks, it is expected that crises will increase and bankruptcy, unemployment and poverty will increase. South Korea is one of the best countries that controls economic conditions in times of crisis and is more committed to the IMF’s plan. However, after borrowing from the Fund in the late 1990s and adhering to the fiscal policy imposed on it, the unemployment rate increased from 3% to 10%. The impact on the rest of the countries that do not reach the level of Korea in taking the necessary measures to resist crises is greater and more comprehensive.

  1. Social unrest

And the clear result of the state’s inability to take into account the needs of citizens in times of crises is that people would take to streets to protest. This is an initial reaction for a group of people being dismissed from work, and at the same time, the price of basic services increases, especially in a country preparing for protests and demands.

During the European economic crisis that began in 2010, the Greek state received 298 billion euros from the Fund and the European Bank and tried to adhere to the reform plan. Yet, this did not prevent people from going out to the streets and causing chaos. The IMF’s independent office admitted in 2016 that the Fund had failed to assess the condition and magnitude of the problem when dealing with European economic crises[4].

  1. Continuous accreditation of the fund

One of the problems that occurred in many of the borrowing countries was their inability to pay according to the plan, even if they committed to the plan. As a result, the fund’s plan must be adhered to for a long time, and this breaches the state’s freedom to decide the path.

Among the borrowing countries, 11 of them have still relied on the fund for more than 30 years, 32 countries relied on the fund for a period between 20 to 29 years, and 41 countries have been under borrowing from the fund for a period of 10 to 19 years. During this period, countries are required to adhere to a reform plan by the IMF[5].

During the Asian financial crisis, Thailand, the Philippines and Indonesia borrowed from the fund and as a result the situation worsened in those countries and were bound by a certain economic policy that changed the economic path of the country even after the end of the crises. In return, Malaysia did not accept borrowing and drew an alternative plan that led to its success in reducing the impact of crises and resolving them, as well as independence in its financial policy[6].

On the other hand, the continued access of financial institutions to support from the state through the IMF in times of crisis is a negative for the economy as it may lead to disrupting the balance between the benefits and the expected damages when taking serious decisions.

  1. Demise of democratic regimes

A democratic state is characterized by providing opportunities for citizens to express their opinions and aspirations, and this is an important step for the country’s progress in various fields. But this privilege is converted into a weapon threatening democratic regimes in the event that the government is unable to control the state’s conditions. In 1971, Ghana and the Fund agreed on some necessary measures to tackle the economic crisis in return for borrowing. As a result of these measures, the value of its currency decreased by 40%, the price of imported items increased, people took to the streets, and the military overthrew the regime after three weeks. Then, the same problem was repeated in Turkey in 1990, where the elected government signed with the IMF to eliminate economic problems. Then, the demonstrations began and led to the military coup and the parliament was suspended[7].

  1. Lack of control at the root of the problem.

Each country has its own background, and not every economic crisis was primarily caused by poor fiscal policy measures. There are causes related to corruption, failure of political systems, natural disasters, external interference, social chaos, etc. Insisting on reforming the economic situation in the manner planned by the IMF while leaving the root of the problem indifferent to the state’s background does not guarantee success in emerging from crises. That is why South Africa had given up the fund since 1994, and Turkey did not resort to it when confronting the crisis recently.

When facing the first wave of the economic crisis in 1995, the state of Mexico borrowed from the fund, committed to its terms, and was able to pay for a short period, and then the situation reversed at the second wave in 1998, as the financial policies taken by the state with the fund did not prepare the state to cope with the crisis and as a result, the state’s economy was destroyed. Borrowing increased and the income of people decreased. This is considered the worst economic situation that the State of Mexico has experienced[8].

By: Mohammed Salman – Debate coach at QatarDebate










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