Delivering human rights and the SDGs: Does IMF Conditionality pass muster?
Last week the International Monetary Fund (IMF) published its Review of Program Design and Conditionality 2018, which provides an overview of the IMF’s lending programmes between 2011 and 2017
While the review includes some positive elements, such as the acknowledgement to improve debt sustainability analysis (DSA), it falls short of fully accounting for the impact of conditionality on:
- public service provision
- labour rights
- gender equality.
It is, therefore, a missed opportunity to evaluate IMF-lending practices against international agreements, in particular the sustainable development goals (SDGs) and international human rights and labour standards.
The review is timely - debt crises are brewing in several low-income countries – and offers the IMF’s view on the design, conditionality and performance of its recent lending programmes , mainly from a fiscal perspective. But, at a time when citizens from Argentina to Jordan are taking to the streets to protest against IMF-mandated belt-tightening policies, it is imperative to highlight the human and development impact of these lending programmes.
Since the onset of the global financial crisis, a global wave of austerity has been chipping away at the welfare state in Europe and compromising development in impoverished nations. And IMF loan programmes are driving this trend, which the institution’s own review reveals. In the six-year period between 2011-17 the vast majority of programmes remained focused on fiscal consolidation, which Eurodad research also confirms. What’s more, the IMF’s influence continues to rise as structural policy conditions – mandating institutional and regulatory reforms – increased by 30 per cent compared to 2011.
On a positive note, however, the IMF recognises the dampening effect of fiscal adjustment on growth: “Programmes,”they note, “also appear to have systematically underestimated the impact of adjustment on growth.” However, one could also ask whether this is truly a result of overly optimistic growth projections, or rather a design feature, in particular, through the use of strict fiscal targets.
Merely referring to the “growth-friendliness” of fiscal consolidation as a benchmark, fails to capture the wider socio-economic impact of fiscal adjustment, especially on inequality. Recent academic research drawing on a large dataset covering IMF programmes in 135 countries between 1998-2014, concludes that : “[…] overall, policy reforms mandated by the IMF increase income inequality in borrowing countries.” Despite its stated ambition on reducing inequality, the IMF’s recommendation considers the “quality” of adjustment merely from a narrow fiscal perspective, neglecting to recognise the impacts of economic policy conditionality on inequality.
On the spending side, the IMF would like to see greater emphasis on limiting current spending, which includes, public employee salaries and pensions, among others. Fiscal adjustment has curtailed countries’ capacities to invest in human resources, which has unequivocally been termed the “wage bill” by the IMF, as countries are required to lay off public servants or cut public sector wages.
Austerity measures and wage bill conditionality as part of IMF programmes tend to increase unemployment in borrowing countries. The poor, particularly women, are more vulnerable to such job crises as they are more likely to be in low-paid, precarious employment, which is also their main source of income. In Ecuador, for instance, IMF policy prescriptions have led to major layoffs and reduced wages. which has severely compromised the provision of basic public services as 2,500 health workers were fired. From an SDG-perspective this is problematic, as the UN estimates that there will be a shortfall of 18 million health workers by 2030.
In a context of generalised austerity, social safety nets that should cushion the effects of fiscal adjustment, are also under pressure. While the review calls for improving the quality of social spending, it fails to address criticisms on the IMF's preferred approach of targeted, rather than universal, social benefits, which tend to increase poverty risks in programme countries.
On the revenue side, IMF programme advice generally calls for governments to broaden the tax base. It it notable however, that such advice is agnostic on the equity impacts of such decisions. Domestic revenue mobilisation will remain an essential tool for helping countries finance the SDGs, but exactly how this revenue is raised is crucial for ensuring fiscal policy reduces, rather than exacerbates, inequalities.
For many years, a combination of policy advice from International Financial Institutions (IFIs) on trade liberalisation and global tax competition has eroded the tax base in many developing countries. At the same time, IFIs have been promoting the introduction of consumption taxes, such as value-added-tax (VAT) systems in developing countries in order to compensate for tariff reductions and lower corporate income taxes. Between 2016-17 alone, IMF loan conditionality called for the introduction of VAT systems in Afghanistan, Egypt and Suriname.
Many concerns have been raised about the potential regressive nature of VAT. If not properly designed and monitored, such taxes may result in increased poverty, especially for women who spend a higher proportion of their income on VAT. However, both the conditionality review and IMF programmes fall short of adequately considering and mitigating such risks, nor do they explain how the promoted tax systems comply with internationally-agreed objectives on progressive taxation from the Addis Ababa Action Agenda.
IMF lending, an adequate tool in averting debt crises?
Aside from the IMF’s recognition of the impact of austerity on growth, its review contains a second positive note: the IMF’s acknowledgment that it needs to improve its debt sustainability analysis (DSA). DSAs are important factors for deliberations on the choice between an adjustment loan or a debt restructuring operation. Internal policies prevent the IMF from lending to insolvent states. In practice however, overly-optimistic views on debt burdens and political considerations have seen the IMF providing loans to over-indebted states. Civil society has criticised this practice as it serves mainly bail out private lenders, which incentivises reckless lending and locks countries into a perpetual cycle of borrowing, without tackling underlying solvency problems.
The increasing use of high-yielding Eurobonds in African countries illustrates how countries can get caught in a debt trap. Many recent low-income country bond issuers currently need to raise money to pay off maturing debt obligations – in essence, new bonds are issued to repay old debts. But as a growing number of these countries are facing major debt risks, markets demand higher borrowing rates. Through IMF programmes more countries are looking to boost investor confidence in order to benefit from discounted yields on new Eurobonds. A sticking plaster, rather than a cure for situations of unsustainable debt.
Debt service payments syphon money away from crucial investment in development and people. Examination of debt burdens should go far beyond a country’s capacity to repay debts. Instead debt sustainability assessments, including the World Bank-IMF DSA, should integrate development priorities and independent human rights impact assessments to assess countries’ ability to cover the needs of their populations. Nonetheless, the IMF’s view on improving its DSA-toolbox will most likely be confined to purely technical tweaks of indicators with limited attention to development priorities and human rights.
Accounting for the human rights impact of macroeconomic policies is crucial in order to achieve the SDGs. Therefore, independent and gender-sensitive human rights impact assessments (HRIA) should inform the full extent of economic reform policies including domestic resource mobilisation, expenditure policies, labour reform and DSAs.
These HRIA, conducted before approving loans and designing programmes, should guide the IMF and its Member States’ policy choice towards either debt restructuring, borrowing from the IMF or a combination of the two.
Currently, high debt service payments topped off with austerity measures are having negative impacts on people across the globe, putting a strain on human development. European member countries from the IMF should show leadership by advocating for integration of HRIAs and SDGs into IFIs’ economic policy-making. There will be several occasions in 2019 for European IMF Executive Directors to table the HRIAs during IMF policy reviews, in particular, the Review of Facilities for Low-Income Countries (LICs), the Debt Sustainability Framework (DSF), the Review of the Fund’s Debt Limits Policy (DLP) and the Strategy for IMF Engagement on Social Spending.
The need to deliver on the promises of human rights and development is long-overdue.