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IMF and World Bank put best feet forward ahead of Bretton Woods II summit
13 November 2008
Rich country leaders are calling for “sweeping overhauls” of the Bretton Woods institutions – and the IMF in particular – as they prepare for a November 15 “Bretton Woods 2” global financial summit in Washington. At the same time the IMF’s loan programs are increasing in number and scope, although with far faster responses to richer countries than to poorer ones. The World Bank has also announced that it will “substantially increase financial support for developing countries, including the launch or expansion of four facilities for the crisis-hit private sector”. Civil society groups have expressed scepticism about the extent to which the Bank and Fund can solve the problems they have played a big part creating.
Developed countries slammed by the financial crisis – including Iceland, Ukraine and Hungary -are signing on to the Fund’s Emergency Financing Mechanism. Developing countries such as Pakistan are receiving emergency financing via the Stand-by Arrangement. Low-income countries such as Nepal are signing new Poverty Reduction and Growth Facility loans (PRGFs) or renewing previous ones. Beyond this 11 countries with existing PRGFs (most in Africa) received significant financial boosts in response to the food and fuel price increases.
In parallel, the IMF has launched a review of its financing role in member countries. According to the Fund, “the purpose of this review is to ensure the institution has the right instruments and policies to help all of its members—with appropriate safeguards of Fund resources—as they integrate into a world of growing and increasingly complex capital flows.” The Board had a first discussion on this process on 22nd September, which described as a “first step towards modernizing the Fund's lending role.” In light of the current context, such first step is only going to be a small one in a long ladder. The scope of the review is broad, including conditionality, instruments for low-income countries, streamlining facilities, and the financial terms of the Fund’s loans. Managing Director Dominique Strauss-Khan expressed his willingness to take seriously the revision of the Fund’s conditionality policy.
Even though current high-level political debates on how to reorganise the whole financial system and financial architecture may make look this review as a useless exercise, it is important to remember that the IMF is likely to be strengthened as a result of the crisis and may prove reluctant to change some of its old-fashioned and most dysfunctional roles.
The IMF’s signalling power as financial gatekeeper is on full display in the current loan negotiations:
- After Nepal’s previous 3-year PRGF program expired in November 2007, the government was not interested or willing to renew it despite intense political instability in the country. However, now bilateral and multilateral donors, from whom Nepal needs aid, have implicitly “suggested the need for reliable international surveillance to ensure that Nepal practices a prudent financial system.”
- In Pakistan, the finance minister made an unsuccessful attempt to ask China for financial assistance to buffer its foreign exchange reserves, which are now at the IMF’s danger-point of holding less than 2 months of imports payments. With the “reluctance of donor nations to provide money without strict economic reforms by Pakistan” it is now back at the IMF’s doorstep.
The Emergency Financing Mechanism was activated during the Bank/Fund Annual Meetings in October as the Fund scrambled to respond to the financial shockwaves rippling across the globe. This mechanism was created in 1995, has been used six times since then, and is being promoted as a truly rapid emergency process where the Board is to consider the loan request within 48 to 72 hours after the IMF and country authorities reach agreement on a lending program and IMF staff draft a report. However this speedy guarantee is contingent on the member country’s track record with the Fund, as “the rules state that member's past cooperation with the IMF has a strong bearing on the speed with which the Fund can assess the situation and agree on necessary corrective measures to put the economy back on track.”
This emergency finance in response to the financial crisis stands in acute contrast to the Exogenous Shocks Facility being pitched to poor countries hit by the food and fuel price crises—which carries the same process modalities as the PRGF and is far from being urgently prioritised by Board discussions within 48 and 72 hours as we see with the Emergency Financing Mechanism. In fact, while Haiti witnessed a major political upheaval stemming from its severe food crisis in early April, the IMF Board got around to discussing boosting lending amounts for Haiti on June 20, almost three months later. Meanwhile, emergency loans for rich countries are being pulled together in a matter of days. This clearly demonstrates a two-tiered prioritisation and urgency level of the IMF between the financial crisis in developed countries and the food and fuel crises in developing countries.
The World Bank, not wanting to be outdone by its sister organisation across 19th street, has issued an announcement of its own splurge of activities. The Bank says it “could make new commitments of up to US$100 billion over the next three years. This year, lending could almost triple to more than US$35 billion compared to US$13.5 billion last year”. At a recent meeting in Washington a Bank spokesperson said that for some countries the institution would front-load its commitments, i.e. make money available to countries in year one, leaving less for years two and three of three year programmes. The World Bank Group also says it will support the private sector, using around $30 billion over the next three years raised from a combination of IFC funds and money mobilized from various sources including governments and other International Financial Institutions. The private sector support mechanisms will include:
- an expanded trade finance program to cover payment risk in trade related transactions;
- a Bank Recapitalization Fund to recapitalize distressed banks;
- an Infrastructure Crisis Facility to provide roll-over financing and help recapitalize existing, viable, privately-funded infrastructure projects facing financial distress.
The IMF and World Bank appear to be in self-promotional overdrive, positioning themselves as part of the solution to the current financial crisis and hoping that politicians and the public will ignore their roles in contributing to the explosive policy mix that has led to the current situation. Civil society organisations – including Eurodad- in a statement released ahead of the Washington G-20 economic reform summit, raised concerns about who will be round the table this weekend: “this group includes many of the people, governments, and institutions whose policies are responsible for the current financial meltdown. As such, we believe they are the wrong group to be charged with reworking global economic rules and institutions. The world needs a process that is much more inclusive of other nations and the peoples of those nations”. As well as a new process, new institutions and approaches are needed, as outlined for example in Eurodad’s Responsible Finance Charter.
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