This article in Phenomenal World, “a publication focused on political economy,” juxtaposes “the rigidity and discipline enforced in IMF loan programs” with the “elasticity in liquidity and legal constraints” and “expedited financing” that is provided to financial institutions in the North Atlantic like Silicon Valley Bank and Credit Suisse at times of crises.
The author makes the case that “[s]urveying the contemporary landscape of sovereign debt and IMF lending programs reveals pervasive inequalities in the Bretton Woods system.” Such inequalities disproportionately impact low- and middle-income economies because “if countries fail to meet the structural reforms spelled out in the IMF’s program review, lending can come to a halt.”
Busting a popular myth, the author writes that “[f]or many developing countries, the problem is not over-indebtedness per se” as “[m]ost governments pay back their external loans, often at the expense of imposing austerity on citizens.” Much like Credit Suisse, “the problem that most sovereigns face today is a liquidity constraint.”
Not only do “[p]rohibitively high interest rates make it difficult to access new financing and roll over existing loans” but high interest rates and debt servicing costs have led to central banks in some developing countries “selling part of their dollar stockpiles to buy—and thereby bolster—their own currencies.” Reportedly, the IMF does not seem to approve of this:
“Recently, IMF economists have criticized central banks that accumulate hard currency reserves to bypass interest rate hikes. But using foreign exchange reserves to purchase and thereby bolster the value of domestic currencies enables central banks to dampen some of the inflation. Given the inherent asymmetry in the international monetary system, hard currency war chests empower countries lower in the monetary hierarchy to cope with financial shocks.”
Between 2013 and now, the IMF’s own assessments have concluded that “IMF-imposed austerity mandates incur more damage to economic growth than previously calculated” and that “on average, fiscal consolidation does not lower debt-to-GDP ratios.”
The author makes a detailed argument that unless there are fundamental reforms in existing IMF lending policies and the Bretton Woods institutions are modernised, “the IMF’s future as the preferred lender for countries in crisis” is itself not secure:
“Much has changed since the initial drafting of the IMF Articles of Agreement in 1944. The Articles have been amended seven times, most recently in 2010. Shifts in the global financial system justify revisiting the Articles as a living document.”
Read the full article here.
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