The political cost of IMF programmes

17 August 2018 by Bretton Woods Project

Artwork by Robin Heighway-Bury

- Political ramifications of IMF programme in Jordan trigger protests
- Jordanian prime minister resigns
- Developments raise broader questions around IMF conditionality

In June, King Abdullah II of Jordan accepted the resignation of Prime Minister Hani al-Mulki, amid the biggest protests in Jordan since the 2011 Arab Spring, after spending two years pushing through a series of unpopular government initiatives and IMF 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.
-mandated reforms.

Widespread protests broke out throughout Jordan in February in response to the rising cost of living and government initiated tax rises on basic goods such as bread, alongside a series of controversial decisions made by the government, in part to meet the budget deficit target in line with Jordan’s IMF agreement, which began in 2016.

Unrest erupted again in June over austerity measures, income tax reforms and price hikes, which were the latest in a long line of controversial reforms adopted by the government since the IMF loan programme began.

The fund has consistently underestimated the importance of calibrating their recommendations to the specific political context, not taking into account the extent to which recommendations are politically viable and socially sustainable.

Amid the chaos, Prime Minister Mulki met with trade unions, who demanded that the highly controversial income tax law be scrapped. Ali Obus of Jordan’s Federation of Unions was quoted in the Guardian asking the state to “maintain its independence and not bow to IMF demands.” However, no agreement was reached. Two days later, Mulki offered his resignation.

The Jordanian IMF loan – what was on the table?

In August 2016, the IMF approved a three-year loan arrangement with Jordan of $723 million under the Extended Fund Facility (EFF), which is a comparatively long type of IMF loan programme designed to address deep structural concerns. The accompanying press release highlighted key challenges for the Jordanian economy, such as the impact of the Syrian refugee crisis and high unemployment.

In the first review under the EFF in June 2017, the IMF was “encouraged by Jordan’s commitment to continue removing exemptions on the general sales, income tax, and custom duties.” Mitsuhiro Furusawa, IMF Deputy Managing Director, further signalled Fund support for the government reforms, stating, “The authorities are committed to continue with a gradual and steady fiscal consolidation to bring public debt toward more sustainable levels. To help public finances rest on a sounder foundation, the removal of exemptions on the general sales tax and custom duties will continue over the program period.” In the following 2017 surveillance review, IMF staff also assessed that the disputed “income tax threshold for individuals and families” would help to “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. efficiency and distributional objectives.”

A June 2017 statement accompanying the latest Jordanian surveillance review by Hazem Beblawi, IMF Executive Director for Jordan and Sami Geadah, its Alternate Executive Director, seemingly aware of evidence on the potentially harmful impacts of such tax reforms on the most vulnerable, noted, “Most of the remaining exemptions were difficult to remove because of their importance for low income households. Nevertheless, further removal of exemptions is planned for 2018, together with better targeting of support to the most vulnerable.” However, targeted social protection programmes have come under mounting scrutiny, as recent research has demonstrated vast exclusion rates – particularly for people who are the most vulnerable – as well as weakened social cohesion (see Observer Spring 2018). Likewise, a recent report by Philip Alston, UN Special Rapporteur on human rights and extreme poverty, on the IMF and social protection critiqued the IMF’s position and recommended a human rights-based approach founded on the principle of universalism in line with internationally agreed definitions (see Observer Summer 2018).

The review also noted a “critical need to advance reforms to lower the formal cost of labor”, potentially implying the need for further labour flexibilisation policies widely considered to undermine labour rights, at a time when the relationship between the government and trade unions is already tense. An attached government memorandum in the surveillance review also stated, “in cooperation with 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.

, we have implemented a number of pilot projects to explore the potential benefits of active labor-market measures”, triggering further concern in particular in light of the Bank’s draft 2019 World Development Report, which endorsed decreased minimum wages, zero-hour contracts and almost ignored fundamental workers’ rights like collective bargaining (see Observer Summer 2018).

On IMF conditionality in Jordan, Gino Brunswijck with Brussel-based civil society network Eurodad said, “Since 2012 repeated IMF-programmes have not managed to bring Jordanian debt down, however, they did lock the country’s citizens into a perpetual cycle of austerity with ever more drastic measures and major implications for political stability.”

When asked about the Jordanian reforms squeezing the middle classes, IMF Director of Communications Gerry Rice noted in a March 2017 press briefing, “in order to end the rapid increase in public debt, the program emphasized the need to broaden the tax base as part of the revenue reform, while alleviating the impact on the most vulnerable.” He continued, “The IMF has not made any specific recommendations on which products should be subject to higher taxes. The IMF has also emphasized not raising the prices of goods that are consumed by the poor.”

The IMF and instability trends

Jordan’s relationship with the Fund is filled with memories of political upheaval. In 1989, five people were killed when it was reported by a resident that, “The riots…were ignited by price increases ordered as part of a debt rescheduling Debt rescheduling Modification of the terms of a debt, for example by modifying the due-dates or by postponing repayments of the principal and/or the interest. The aim is usually to give a little breathing space to a country in difficulty by extending the period of repayment and reducing the amount of each instalment or by granting a period of grace during which no repayments will be made. deal between Jordan and the International Monetary Fund.” Nearly a decade later, in 1996, with a fresh IMF deal signed, riots once again broke out, as did calls for the administration to resign.

As critics have noted for some time, political upheaval and public outrage due to hardship during IMF agreements are not an uncommon phenomenon (see Update 38). In the last year alone, mass demonstrations specifically targeting IMF programmes have taken place in, among others, Argentina, Egypt, Haiti, Sri Lanka and Tunisia. In Haiti, an IMF monitoring agreement secured in February 2018 resulted in drastic fuel price hikes of up to 51 per cent, triggering widespread violent civil unrest, resulting in the death of several people. In early July, Jack Guy Lafontant, the Haitian prime minister, resigned.

In response to the implications of IMF involvement in Haiti, Alston asserted in a July statement, “The fund has consistently underestimated the importance of calibrating their recommendations to the specific political context, not taking into account the extent to which recommendations are politically viable and socially sustainable.” He stated that such drastic fuel price increases were, “guaranteed to lead to a backlash and bizarrely, undermine the very programs the Fund is trying to implement.” Alston added, “The social and economic and political consequences of cuts of that size are very large.”

The remarks give further weight to the recent Independent Evaluation Office report on fragile states, like Haiti, which found that the IMF’s financial toolkit is “not inherently well suited to the circumstances of fragile states”, due to its relatively short-term focus and that within the Fund “less attention [is] paid to the ability to make a difference to countries’ policy making on the ground” (see Observer Summer 2018).

In Tunisia, IMF-backed austerity measures, as well as hikes in VAT and other taxes including on fuel and electricity resulted in widespread discontent on the streets of Tunisia in January (see Observer Spring 2018).

In Argentina, despite thousands repeatedly protesting an IMF deal, the government, led by President Mauricio Macri, reached an agreement on a 36-month Stand-By Arrangement of $50 billion in June – the largest credit line in the history of the Fund. Mass protests erupted in response, with demonstrators demanding jobs and calling for an emergency budget for the poor. One protestor said to the news outlet Al Jazeera, “We’ve seen the situation deteriorate since Macri took office. We see it in the soup kitchens, we walk the slums, and there is need.” In July, an alliance of Argentine trade unions and civil society sent a letter to IMF Managing Director, Christine Lagarde, once again stressing the opposition of civil society to the IMF deal (see Observer Summer 2018).

In Sri Lanka, protests broke out last year against a new Inland Revenue Bill, which protestors charged “was drafted by the IMF to slap higher taxes on people,” according to the Sri Lanka Daily Mirror, while last year also witnessed immense protests in Egypt over cuts, which the UK-based Guardian newspaper attributed to being intended to “overhaul Egypt’s moribund economy in order to receive a $12bn IMF loan.”

These examples provide new evidence that, as civil society and academics have long maintained, far from being neutral, the fiscal decisions relating to IMF programmes – either as a direct or indirect consequence of loan conditionality – are inherently political and potentially destabilising.

Yet, there appears to be an unwillingness within the institution to accept the impact of IMF policies on instability. In 2016, on the subject of the political economy of structural reforms in Spain, in the face of the widespread protests that took place in Spain that year, Zhu Min, then IMF Deputy Managing Director stated, “I think they [the Spanish government] are doing fantastic jobs”, noting the ‘maturity’ of European societies in understanding “that structural reform is a must.”

Conditions apply

A radical change in the way the IMF deals with the political implications of its programming has been demanded by civil society since the days of the Structural Adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

Programmes. Only last month, over 50 civil society organisations sent a letter calling on the IMF to drastically rethink its conditionality. The letter stated that, “restrictive fiscal and monetary policies prescribed in IMF loan conditionality squeeze the fiscal space needed for public investment and too often result in devastating consequences – particularly for marginalised groups – at high political cost.”



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