Khaya Sithole | A history of IMF conflicts, co-ordination and concessions

Khaya Sithole
Khaya Sithole
  • This week, the IMF approved a funding request for South Africa under its Rapid Financing Instrument (RFI) programme.
  • A number of concessions have applied, ranging from the annual quota allowed to the terms of engagement.
  • In the RFI programme, the IMF indicates no contentious conditions are attached to it, even though a road map towards repayment is still expected.

This week, one of the most contentious convergences between finance, politics and human life finally occurred in South Africa.

After a long series of negotiations and arm-twisting, the International Monetary Fund (IMF) approved a funding request for South Africa under its Rapid Financing Instrument (RFI) programme.

The programme exists to enable member countries to apply for finance when facing an urgent balance of payment needs.

In response to the coronavirus pandemic, the IMF identified the disruptive nature of the outbreak and its concomitant impacts on global economic value chains and human mobility, as an event that warranted a drastic response.

Historically, member nations that are able to tap into the RFI programme are able to only access funds within a prescribed limit. Once an amount has been allocated to a qualifying member nation, its annual "withdrawal" is limited to 50% of its approved funding. On a cumulative basis, the quota is limited to 100% of the allocated funding.

In response to the coronavirus outbreak, the IMF amended the annual quota from 50% to 100%, thereby allowing nations that qualify for assistance to receive it immediately rather than in tranches.

More importantly, the cumulative quota limit has been amended from 100 to 150% which in theory means a country may receive more than what it is entitled to according to the pre-existing formula.

Such concessions seem to have been motivated by the fact little is known about how the virus will manifest and spread over the next year and beyond. The concessions window is scheduled to run for six months ending in October 2020.

South Africa's application therefore fell within this concessions window which enables the country to access its full facility rather than just 50% of it.

The second concession adopted by the IMF that is relevant to South Africa relates to the terms of engagement with member nations that borrow from the IMF itself.

For borrowings outside the RFI programme, the IMF is known for requiring a set of commitments that - depending on scale, scope and political persuasion - may be regarded as draconian.

Within the RFI programme however, the IMF works on the premise the countries that do participate in it are dealing with a short-term emergency and hence it does not come with the fully fledged adjustment programmes or reviews associated with general IMF funding.

The third concession relates to the cost of the agreement itself.

The stated interest rate of 1.1% is relatively low in comparison to other traditional sources of funding. More importantly, for a country with a credit rating "enjoyed" by South Africa, the traditional sources of financing would be even more expensive.

The curious thing about IMF concessions is that they are as rare as they are contentious.

The IMF's mixed history in intervening during times of crisis has created scepticism and anxieties about what happens when politics rather than principles drive decision-making. The decision to bail out Greece in 2010 was summarised by the Brazilian representative to the IMF as nothing more than a bailout of Greece's private bondholders - made up of big European banks - rather than a bailout of Greece itself.

But it is when finance, politics and the preservation of human life intersect where the IMF has a lot of questions to answer. Six years ago, as West Africa experienced another bout of the Ebola outbreak, the IMF committed to providing $300 million to the worst-affected nations - Liberia, Guinea and Sierra Leone.

The capacity of those countries to manage to outbreak was hampered by their fragile healthcare systems that had little capacity to manage and contain the outbreak. While the commitment of the IMF was lauded by the G20 and World Bank, a rather difficult question of how it had contributed to the crisis loomed large in the room.

It just happened to be that all three countries were regular borrowers from the IMF which had been part of its various programmes since 1990.

The main point to note - as ever - is that the road to the IMF is paved with many variables ranging from natural disasters, wars, famine and poor governance. The effect of these variables is that affected countries exhibit poor socioeconomic variables ranging from poverty, unemployment, inequality and poor infrastructure.

The consequential impact of this is simply that such countries would firstly struggle to raise finance through internal resources, and find financial markets too expensive.

The IMF - with its lower costs - becomes an option for countries in distress. The main problem with negotiating through adversity is the prevalence of adverse consequences associated with that.

In the IMF context, countries in distress sign up for a series of commitments and concessions that theoretically seek to put them in a stronger footing and enable the repayment of loans.

Regrettably, the IMF model seems to have a good ability to quantify the funding question but a poor ability to appreciating the social cost and consequence question. The nature of adjustments "recommended" by the IMF to borrowing countries have the unintended consequence of worsening the fate of nations.

For a country with high unemployment that takes up an IMF loan with the commitment to cut the civil service wage bill for example, the obvious effect is an increase in unemployment unless the private sector creates enough opportunities to absorb the displaced.

Unfortunately, there are strong correlations between countries requesting IMF assistance and their inability to drive economic activity in a manner that leads to an easy transition of the displaced civil servants into alternative opportunities.

Similarly, when the IMF recommendations lead to a decline in social infrastructure investment, the effects are passive but pervasive and intergenerational. This was the case of the three countries that experienced the Ebola outbreak in 2014.

In its comment paper titled The International Monetary Fund and the Ebola Outbreak, the Lancet Journal conducted an assessment of the policies advocated by the IMF across the countries since 1990.

The common features of IMF conditions - reductions in government spending, cutting the civil service wage bill and prioritisation of debt repayments - were prevalent across the three nations.

The effect of these IMF adjustments on the healthcare systems of the three nations were evidenced by low levels of social spending and human capital constraints directly associated with the IMF requests for the cutting of the wage bill.

In the Sierra Leone example, the IMF had - in the late 1990s - required the retrenchment of 28% of government employees. That decision on its own, had long-standing consequences for critical public services, including health care.

Additionally, another long-standing favourite recommendation of the IMF - decentralised healthcare systems - was also adopted in Guinea which resulted in poor co-ordination and articulation across the different spheres of the healthcare system with fatal consequences when an outbreak like Ebola engulfed the country.

The lessons for the IMF and its member nations since then, has been the need to understand the long-run effects of all conditions rather than the singular focus on the ability to pay.

In the RFI programme, the IMF indicates no contentious conditions are attached to it, even though a road map towards repayment is still expected.

This provides an opportunity for countries like South Africa to commit - at least in spirit - to following many of the conditions that are intended to ensure fiscal prudence and transparency in the utilisation of funds. Given the low levels of trust between the public and the state these days, any conditions relating to transparency can only be welcomed.

Whether that transparency paradigm - however it is formulated - can become the baseline model for how the state interacts with a society anxious about corruption and mismanagement may be the one learning lesson from the IMF conversation that South Africans eventually learn to appreciate.

That of course depends on whether they can trust the same people whose dire track record in state custodianship has led us here to somehow discover a new dawn in public accountability.

Having opened the door to the IMF corridors, it would be tragic if our next trip down that road cannot be cloaked under the guise of managing a healthcare crisis, but a much broader, intergenerational social crisis.

Khaya Sithole is an accountant, academic and activist who writes and tweets on finance, economics and politics. Views expressed are his own. 

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