The International Monetary Fund (IMF), conceived at the Bretton Woods conference in 1944, finally emerged the following year as a major financial agency of the United Nations. More recently, it defined its mission as “working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world”.
It is obvious that, in certain circumstances, those aims can only be contradictory or even mutually exclusive. Such tensions were baked into the organisation from the start, due to the divergent views of the US Treasury mandarins and John Maynard Keynes, which partly explains the sometimes volatile statements the IMF is prone to utter today. Some of those remarks seem more likely to provoke instability than to induce confidence.
Jeremy Hunt, the chancellor, has taken issue with the IMF’s pessimistic prediction of a 0.3 per cent contraction in the UK economy this year, followed by sclerotic growth of just 1 per cent next year. That gloomy forecast was at least a modest revision of the IMF’s previous estimate that Britain’s economy would shrink this year by 0.6 per cent. The chancellor pointed to a prediction by the Office for Budget Responsibility (OBR) that the UK will grow by 1.8 per cent next year. “Our forecasts are significantly better than the IMF’s forecast,” he said.
Granted that the IMF is in the business of trying to predict global economic trends, country by country, the question remains whether its more downbeat prophecies, such as its current forecast of British economic prospects, may, in the present volatile climate, influence markets adversely and repel potential investment in Britain. The IMF’s track record in forecasting is less than perfect: early last year it hastily cut its global growth forecast by half a percentage point to 4.4 per cent and increased its inflation prediction for advanced economies by 1.6 per cent, to 3.9 per cent, without admitting to any error in its calculations.
But Jeremy Hunt’s mild expostulation pales into insignificance, compared to Brazilian President Luiz Inácio Lula da Silva’s strictures against both the IMF and the World Bank. Lula accused the IMF of asphyxiating the economy of Argentina: “A bank shouldn’t choke national economies, like the International Monetary Fund is doing in Argentina. No ruler can work with a knife on his throat because he is in debt.”
Lula, a veteran Latin American leftist, was speaking in Shanghai during a state visit to China, where he was attending the inauguration of one of his predecessors, Dilma Rousseff, as president of the BRICS’s New Development Bank (NDB). Lula warmly praised the NDB, claiming that it “frees emerging countries from submission to traditional financial institutions”.
Such rhetoric, of course, was calculated to flatter his Chinese hosts. The IMF last month approved a disbursement of $5.4bn to Argentina – that country’s 22nd IMF loan – where inflation is running at above 100 per cent. A 2018 IMF loan to Argentina totalled $56bn, even though its annual debt repayments were far above the Fund’s own limits and the loan equalled the amount disbursed by the IMF to 85 other countries during the Covid pandemic.
The IMF stands accused of reckless lending to 17 other nations, including Afghanistan, Pakistan and Egypt, all rated as high risk. For decades there has been fierce criticism, both from debtor countries and from the left, that the conditionality imposed by the IMF on its loans actually retards the development of emerging economies by burdening them with crippling debt repayment: the president of Argentina, in an angry speech to the UN General Assembly in 2021, claimed that Latin America and the Caribbean nations allocate 57 per cent of their exports to the payment of external debt services.
Yet, in fairness to the IMF, it can hardly be expected to hand out massive amounts of cash without attaching conditions designed to impose fiscal discipline and financial reforms on the recipient nations. Basically, the conditions the IMF exacts are fiscal austerity, high interest rates, trade liberalisation, privatisation and open capital markets. While those conditions amount to a concise blueprint for responsible capitalism, and privatisation, for example, should be non-negotiable, fiscal austerity today has a tarnished reputation and may do more harm than good, as the UK knows to its cost.
The IMF’s intervention in Greece, where in 2015 the “Troika’s” loan terms were rejected in a national referendum, overridden by the government, marked the tipping point where many people began to wonder if the medicine was killing the patient. It is no coincidence that the roots of the Greek crisis lay in fraud, when Greece bluffed its way through the EU convergence criteria for entry into the eurozone that insisted the national deficit must amount to no more than 3 per cent of GDP, when its actual deficit was 8.3 per cent. Inevitably, that ended in tears.
But the IMF’s present head is allegedly not above a spot of sleight of hand. Its managing director, the Bulgarian Kristalina Georgieva, when previously CEO of the World Bank, was accused of complicity in a scandal involving manipulation of China’s status in the Bank’s “Doing Business” report. Chinese officials complained that their country was ranked too low in the 2017 edition of the report and demanded promotion in the 2018 version. In the event, the data for 2018 reduced China’s ranking seven places lower.
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From October 2017, it was alleged, Georgieva became “directly involved” in inflating China’s ranking by pressing for the alteration of certain performance indicators, enabling China to retain its 2017 status. Georgieva vehemently denied the accusations and, after an investigation, the IMF executive board declared its full confidence in the managing director and its trust in her “maintaining the highest standards of governance and integrity in the IMF”.
The World Bank, like the IMF, has appeared rather too cosy with China. The IMF expelled Taiwan from membership back in 1980, under pressure from President Jimmy Carter, and replaced it with China. Now, however, as the Brazilian president’s grandstanding statement in Shanghai indicated, some leftist nations are canvassing China’s New Development Bank as an alternative financial support system to the IMF.
In that notion they may be miscalculating. China has got its fingers burned by bad debt, notably in Sri Lanka. It is estimated that 60 per cent of Beijing’s overseas loans are to countries in financial distress. This has coincided with an existential threat from its domestic property market and a huge productivity setback due to the coronavirus returning to its homeland. Financial caution is now affecting Chinese policy: Belt and Road has been supplanted by belt and braces.
But if the IMF is not threatened by a rival source of largesse to needy nations, it is increasingly encountering scepticism regarding its economic analyses – it has too many competing economists – as well as its continuing competence and relevance. It has become too political: all five of its managing directors in the 21st century have been politicians, a change from previous decades.
This has been particularly evident in its treatment of Britain. The IMF’s trenchant attack on Liz Truss’s attempted economic reforms struck a false note among the world financial community. Granted, her short-lived government was attempting to do the right things – albeit at the wrong time and in a cack-handed way, with unforeseen consequences for pension funds and markets panicking in an extravagant style – the criticism levelled at the UK by the IMF was in total contradiction of its own track record.
In an unprecedented rebuke to a G7 nation, the IMF denounced Britain for introducing large tax cuts because they would chiefly “benefit high-income earners” and “likely increase inequality”. Since when did the IMF deploy such bleeding-heart social democratic arguments? Was this truly the voice of a member of the Troika that hiked up the suicide rate in Greece as it imposed its prescriptions?
This startling transformation provoked former Greek finance minister Yanis Varoufakis to comment: “One would be hard-pressed to identify a single IMF ‘structural adjustment program’ – ask Argentina, South Korea, Ireland, or Greece – that had not increased inequality.”
There is a persuasive argument that the IMF panicked, unnerved by turmoil in the US Treasuries market and fearing that Britain would trigger some kind of domino effect to create a perfect storm. But that explanation is not incompatible with a complementary pendulum swing by the IMF, under pressure from the Biden administration, the WEF and all the usual suspects, to counter the growing “populism” of European electorates, of which Brexit was the most potent example and which has put the United Kingdom on the naughty step for the indefinite future.
There is plenty of evidence unrelated to the Truss debacle that points to the increasing politicisation of the IMF. This comes at precisely the time when the precarious world economy urgently needs the kind of neutral, apolitical institution the IMF was originally designed to be, to stabilise global finance. Instead, it is rolling around the deck like a loose cannon.
In the light of de facto deglobalisation, the Ukraine war and the return of a new version of the Cold War, against which the IMF stridently warns but for which it provides no credible solution, the Fund is beginning to look almost destructively irrelevant. If it cannot reform itself and recalibrate its approach to global debt relief, while also shedding its political preoccupations and personnel, it may become so evidently unfit for purpose as to compromise its continued existence.
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