IMF expands lending programs to prevent financial crisis

The International Monetary Fund is expanding its lending programs, especially to middle-income countries that have trouble accessing capital. The IMF is calling it part of its “crisis-prevention toolkit,” designed to prevent a future financial crisis. But critics say the only thing the IMF is saving is itself. They say the IMF was becoming irrelevant, and that its track record in financial crises is spotty: often adding to the damage, instead of providing rescue. Tanya Snyder has more.

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The International Monetary Fund is expanding its lending programs, especially to middle-income countries that have trouble accessing capital. They’re calling it part of their “crisis-prevention toolkit”, saying access to credit could help prevent a future financial crisis. But critics say the only thing the IMF is saving is itself. They say the IMF was becoming irrelevant before the crisis, and that its track record in financial crises is one of adding to the damage, and not providing needed rescue. Tanya Snyder has more.

Soon after the global credit crisis began, the IMF created a new “Flexible Credit Line" or FCL. Most of the IMF’s lending is to low-income countries, but the FCL targeted wealthier countries, to offer a lifeline when even normally strong economies are flailing.
 
Now they’ve announced another program, called a Precautionary Credit Line. It strikes a middle ground. It’s for countries with economic policies generally in line with IMF prescriptions and generally sound finances, though it allows for more leeway than the Flexible Credit Line. 
 
Nancy Alexander is with the Heinrich Böll Foundation, an international non-profit associated with the German Green Party.

NANCY ALEXANDER: The IMF has failed to see any crises coming – and that goes for the Asian financial crisis, the Argentina crisis, the global crisis – so the idea that the IMF could help countries stave off crises when they can’t recognize crises coming, is an irony.

Indeed, the IMF was losing standing in the world before the economic crisis, and in the crisis it’s found an opportunity. Mark Weisbrot is co-director of the Center for Economic and Policy Research.

MARK WEISBROT: In some ways they’re much more powerful than ever were in terms of resources, they’re trying to get up to $1-trillion.  They’ve never had anywhere near that amount of resources. That’s huge compared to what they were at any time in their history.

But many countries, especially in Asia and Latin America, have shunned the IMF after bad experiences, and Weisbrot says those countries aren’t coming back into the IMF’s fold.

WEISBROT: In that sense they did not regain the influence they lost over the last 15 years. What they did was create a new and powerful influence in other countries.

Poor countries have often objected to the conditions the IMF places on loans. The IMF generally insists that countries rein in inflation and pay down their deficits as stabilization measures. These conditions preclude the kinds of emergency spending the U.S. has undertaken to stimulate the economy and to protect poor people who have been impacted by the crisis.

Even in the midst of its current humanitarian disaster, Pakistan is facing pressure from the IMF to meet conditions related to its tax code and energy services. Melinda St. Louis is the deputy director of Jubilee USA, a coalition working for debt cancellation for poor countries.

MELINDA ST. LOUIS: It’s inappropriate for the IMF to insist on the types of conditions that would increase  the tax burden on the Pakistani poor, as well as increased electricity prices, which will again, disproportionately affect the poor who are facing the brunt of this disaster.

The kinds of conditionality at work in Pakistan would be a little different for the Flexible and Precautionary Credit Lines. For those, the conditions are what are called “ex ante” – meaning, the IMF isn’t overtly dictating changes a country has to make, but it’ll give preferential treatment to countries that meet those conditions already.

In the eighteen months since its inception, only three countries have applied to qualify for the Flexible Credit Line, and none of them have actually tried to access any money. It remains to be seen whether the Precautionary Credit Line will have a greater impact.

In many cases, the ability to show access to the IMF credit line may be all that’s needed for a country in trouble, to provide a guarantee to nervous investors. But St. Louis says if the country actually needs to draw on the credit and take out a loan, it could end up with a debt burden it can’t afford.

ST. LOUIS: Countries facing a financial crisis, for example, what happened in the past couple of years, for most of these developing countries, that was a shock they had no hand in creating. And so for no fault of their own they’re now faced with a situation where they have to take on new debt.

Jubilee USA is calling for debt cancellation for Pakistan, so that the country can use its resources for recovery, and not debt service. The group also wants all new support to Pakistan to be in the form of grants, not new loans.
 
- Tanya Snyder, FSRN, Washington