Running to the now ‘reformed’ IMF would be a mistake

3 June 2020 by Dominic Brown

Covid-19 creates an opportunity for the government to act boldly, which includes greater investment in social services and a much larger public sector

Historically regarded as a villain that has obstructed the prosperity of “developing nations”, the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(IMF) has taken many of its critics by surprise. It is now saying that exchange controls (finally on outward flows, not just inflows) are precisely what “developing nations” need to exercise sovereignty. But it’s not just its recommendation of controls that’s so surprising.

In response to the coronavirus, the IMF is now offering grants or loans with comparatively low interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
(albeit dollar denominated), and with few conditions attached. This has been sufficient for Esra Uğurlu and Adam Aboobaker (Reformed IMF has options with fewer strings attached, May 27) to argue that turning to the IMF is an attractive prospect to source cheap financing to save lives.

There are serious problems with this position. First, it is based on the incorrect assumption that South Africa(SA) has a foreign exchange reserve crisis and an urgent balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. crisis and therefore accessing a loan from the IMF is desirable to raise the foreign currency to cover medical imports and SA’s short-term, foreign-denominated debt service Debt service The sum of the interests and the amortization of the capital borrowed. costs.

Secondly, the argument fails to consider the medium- to long-term term implications of an IMF loan given the unfolding global economic recession and the types of reforms that will be needed to save lives. Finally, the argument mistakenly claims that the IMF has changed its spots and that it would be a tragic mistake for this not to be recognised.

The SA Reserve Bank notes that an adequate level of reserves equals the value of three months of imports or the equivalent of short-term, foreign debt service costs. At last count SA had access to $43bn (R754.65bn) in foreign currency reserves — not counting $6.9bn in local gold reserves — a slightly healthier level than it was before the outbreak of the coronavirus.

SA’s imports for 2019 cost R1,490bn, which, in today’s significantly devalued currency, would cost just less than $85bn. This means, based on last year’s higher levels of trade and imports, we could cover the import costs for six months, double the level required by the Reserve Bank — more than sufficient to cover all urgent medical imports.

What about our ability to service short-term, foreign-denominated debt costs? SA’s total state debt service cost in the 2020/2021 budget was R229.1bn. A very small percentage (10%) of this is required to be paid back in forex. Of course, the problem remains that corporations, banks and parastatals have borrowed from international creditors to the sum of $185bn (just more than half of which is denominated in forex).

This is what is behind the rising debt-to-GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
ratio that typically results in the IMF being brought in. But this raises the question as to why SA foreign debt jumped by $100bn during the “nine lost years” of the Zuma regime. Is all that foreign debt legitimate?

How many parastatals borrowed from the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, the China Development Bank, the Brics New Development Bank, the African Development Bank and other institutions whose credits, to the likes of Brian Molefe and Siyabonga Gama, were demonstrably corrupt, (think of the loan to Medupi, or the loan to purchase the oversize locomotives)? A debt audit should therefore be mandatory, before there is any further servicing of the foreign debt.

Nevertheless, according to Reserve Bank requirements, the country is far from having a forex reserve crisis. This does not mean we should not be thinking how to strengthen our forex reserves situation; it proves only that we do not have to go to the IMF to do so.

Regulating capital outflows through the implementation of more stringent capital controls — now more easily implemented as illustrated by the IMF’s own position — as well as the introduction of import substitution measures and limiting the imports of luxury items, a public audit and scrapping of anything illegitimate, would all be key measures in this regard. Given all of the above, a loan is not required. The question may then be asked, but why not take the loan anyway, given the concessionary interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates and seemingly few strings?

Besides the loan not being needed, it is also undesirable. Beyond not having a forex reserves crisis now, nor an urgent balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of payments situation, the first major problem is that this loan from the IMF, even though small (now) with “few strings”, must be paid back in dollars. Such a loan will therefore only exacerbate the problems of SA’s balance of payments (and the structural weaknesses in the current account), rather than ameliorate them.

The latter problem we face is due to the “‘phasing out and liberalisation of exchange rate controls” by the post-apartheid government as early as 1995. This means that since the early 2000s the country has experienced a surge in financial inflows. Many attribute this phenomenon solely to the increase in portfolio investment, but there has been an equal rise in foreign direct investment (FDI).

This led to a subsequent increase in the level of outflows, in the form of profits, dividends and interest payments — to the non-resident bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. and equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. holders responsible for the inflows — with the ensuing pressures on the current account.

This situation has locked us into the requirement of unusually high interest rates to attract financial inflows. Needed to boost the capital account to offset the relatively high current-account deficit that is constantly exacerbated by the outflows, and so on, as the cycle is reproduced.

Having to repay more dollar-denominated debt will create greater dependence on FDI and portfolio investment and exports to raise the forex to service that debt. These structural problems make it difficult to break from the country’s export-orientated growth path and dependence on financial inflows. However, being difficult is different from being impossible.

Our government’s response to Covid-19 is an invitation for us to act boldly; this includes greater investment in social services and a much larger public sector. Doing this will require the implementation of a wealth tax, the mobilisation of domestic resources at regulated interest rates, prescribed assets and using the Reserve Bank more effectively. These are measures our Treasury is against taking, a stance coincidentally supported by the IMF.

All else aside, it’s worth investigating whether the IMF is finally reformed. Uğurlu and Aboobaker urge us to acknowledge “the transformation the IMF has undergone over the years”. They go on to argue that the IMFs “rapid financing instrument (RFI), which provides financing at a 1.1% interest rate to be paid over three to five years”, may be the solution for us. However, while RFIs do provide financing at concessional interest rates, they are not a free lunch: the Treasury would be “required to co-operate with the IMF to make efforts to solve ... balance of payments difficulties”.

Recall that such co-operation led directly to the $160bn in public-sector wage cuts in the February budget, thanks to the IMF’s article IV consultation a month earlier. It “encouraged the authorities to implement strong fiscal consolidation and state-owned enterprise (SOE) reforms to ensure debt sustainability, accompanied by decisive structural reform measures to boost private-sector led, inclusive growth ... Directors suggested reductions in the public-wage bill and fiscal contingencies from SOEs, coupled with improved tax administration and compliance”.

While this position may have changed slightly since Covid-19, given the need to prevent the global economy from crashing, the contradictions between its research and its policy recommendations remain as spotted as ever. The IMF’s chief economist Gita Gopinath was crystal clear that austerity will soon return: “We are completely cognisant of that this is a crisis where countries will have to spend — there’s a need for spending on health, for spending on workers and firms, this is not the time for austerity. Later on, when we are on the other side of this, of course that would be the time to put the right strategy in place to make sure your books are in good shape”.

The leopard still has its spots, one only has to look a little closer to see that not much has changed. Even if some may argue that the IMF has less sway than some give them credit for, it’s clear the Treasury does not require a stick to dance to the IMFs tune.

Dominic Brown

Dominic Brown is an activist and leads the economic justice programme at the Alternative Information & Development Centre, Cape Town, South Africa .



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