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What IMF-advised “social welfare reforms” in Mongolia could mean for the country's poor

19 November 2009

Over the past few months, Civil Society Organisations and the IMF have engaged in a debate over whether the IMF has relaxed its fiscal stance (and other macroeconomic conditions and policy advice) in its crisis response programmes or not.

The IMF claims, in its paper “Creating Policy Space – Responsive Design and Streamlined Conditionality in Recent Low-Income Country Programs,” that “fiscal policy (fiscal targets in their programmes) has accommodated larger deficits during the crisis.” On the other hand, research by Eurodad – “Bail out or blow out?” – and other NGOs shows that the IMF is still advising stringent fiscal and monetary policies to low income countries. The Center for Economic and Policy Research published a review in October of IMF crisis programmes, “IMF-Supported Macroeconomic Policies and the World Recession,” and found that many still exhibit pro-cyclical rather than countercyclical features.

The IMF also claims that “most programmes in 2008-9 have envisaged higher social spending, with many also focusing on better targeting of social spending.” However, while the principle of maintaining social spending is laudable, realities at country level may differ from broad – and vague – principles designed at headquarters in Washington.

Belt-tightening in Mongolia

The case of Mongolia is telling of how the IMF’s relaxation of fiscal targets is little more than a mirage when looked at more closely. Despite increasing deficit targets for 2009, actual government expenditure decreased, from 40.2% of GDP to 36.8% in 2009.

The IMF programme also foresees the submission to the Parliament of a new fiscal responsibility law to moderate spending in the future (the agreement foresees a decrease in the non-mineral deficit from 15.1% of GDP in 2008 to 9.1% in 2010). [1] To reach the target deficit, Mongolia will have to implement several spending cuts, including “a comprehensive overhaul of the entire system of social transfers.” [2] The second review of the Stand-By Arrangement continues ito include the structural benchmark that requires passing “a comprehensive social transfer reform that saves money and protects the poor through better targeting.” [3]

Despite the widely advertised abolition of one type of IMF condition in March 2009, the structural performance criteria (SPC), the Stand-By Arrangement for Mongolia shows that the continued use of structural benchmarks has a very similar effect. Although the benchmarks are not binding conditions, the reality is that this particular one has triggered a bitter discussion in Mongolia, including between Mongolian authorities and the IMF, over how to reform the social welfare system, and particular the child money programme – designed to use some revenues from the copper fund to provide support to the country’s poor children.

Social Welfare Reforms – will the child benefit be cut?

It seems that the IMF has advised Mongolian authorities to eliminate the universality of the child money programme; to consolidate and reduce the number of social welfare benefits; and to improve pro-poor targeting. The IMF insists that these reforms won’t harm “priority social expenditures,” and that they will make social protection spending more efficient by improving targeting to the poor. However, what will happen to “non-priority” social spending? What is included and what is not under the very broad heading of “priority” social spending? What does “pro-poor targeting” mean in a country where more than a third of the population lives with less than $1 a day, and which is still well above the poverty reduction targets set for 2015?

Due to the high sensitivity of these issues, and the government’s refusal to phase out the universal child benefit, the proposal to reform the social welfare system seems to have now been delayed, or at least postponed until the next year.

In a recent CSO meeting to analyse research on the impact of the crisis at a national level, existing welfare programmes and social spending were identified as one of the most effective tools which had increased resilience of developing countries to weather the worst effects of the crisis. In the context of a crisis, there is not enough time to set up new schemes and safety nets, as the response required needs to be quick. However, some of these mechanisms were not in place, partially due to previous policies advised by the International Financial Institutions to introduce user fees for essential services or to privatise the provision of public services, such as health.

A recent draft document of the United Nations on the impact of the crisis in low-income countries that Eurodad had access to actually echoes developing countries’ concerns “with earlier orthodox policy prescriptions (by the IFIs).”

Retaining domestic revenues to pay the crisis’ bill

When asked why they are still stringent with fiscal targets, the IMF claims that they would allow for greater flexibility if the countries had the resources to be spent. But all too often, the lack of resources is to a great extent due to the fact that past IFIs conditions and policy advice have encouraged rather than prevented reverse financial flows draining the resources of developing countries. Interestingly, the UN document argues precisely that available resources should not be taken as given. The document points at the need to “identify potential sources of fiscal space for socially-responsive options, (such as) external financing without jeopardising macroeconomic stability (e.g. grants, concessional borrowing, or debt relief); domestic borrowing and resource mobilization; using reserves when feasible; more accommodating macroeconomic policy frameworks for both social and economic recovery; increasing domestic revenues such as by increasing progressive taxation; and eliminating revenue leakages (closing tax loopholes).”

In the case of Mongolia, maybe a better stabilisation of the copper fund to save resources in the good years for a rainy day, could enhance the potential of this commodity fund to redistribute wealth within the country. In addition, no doubt that more can be done in developing countries to retain more revenues from the exploitation of their wealth and natural resources. At a conference on the European Investment Bank on the 18^th of November in Brussels, the Chair of the Development Committee of the European Parliament, said “Norway retains 70% of the wealth generated by its oil. Zambia retains only 2% from their copper mines. The World Bank opposed any reforms in the tax system that would harm foreign multinational companies exploiting Zambia’s copper mines. But Zambian authorities dared to challenge the advice of the IFIs.” The Zambian story is not yet finished, and after increasing tax revenues from the copper mines, the authorities were again under pressure to slash tax pressure. These are, ten years later, the smoking guns of the IFIs' privatisation and liberalisation conditions. Will the IFIs change this time round?