controversy surrounds it. True, economies in transition, emerging
economies, developing countries and, lately, even Asian Tigers all feel
the brunt of the IMF recipes. All are loudly complaining. Some
economists regard this as a sign of the proper functioning of the IMF -
others spot some justice in some of the complaints. The IMF is supposed
to promote international monetary cooperation, establish a multilateral
system of payments, assist countries with Balance of Payments (BOP)
difficulties under adequate safeguards, lessen the duration and the
degree of disequilibrium in the international BOPS of member countries
and promote exchange rate stability, the signing of orderly exchange
agreements and the avoidance of competitive exchange depreciation.
It tries to juggle all these goals in the thinning air of the global
capital markets. There is little dispute that the IMF is indispensable.
Without it, the world monetary system would have contracted more
readily and many countries would be worse off. It imposes monetary and
fiscal discipline, forces governments to plan, and introduces painful
adjustments and reforms. It serves as a convenient scapegoat: the
politicians can blame it for the economic woes that their voters
endure. Lately, it began to lend credibility to countries and to manage
crisis situations. But, this scapegoat role allows politicians in
Russia to hide behind the IMF leaf and blame the results of their
incompetence and corruption on it. Where a reformed market economy
could have provided a swifter and more resolute adjustment - the
diversion of scarce human and financial resources to negotiating with
the IMF seems to have prolonged the agony. The abrogation of
responsibility by decision makers poses a moral hazard: if successful -
the credit goes to the politicians, if not - the IMF is always to
blame. Negative feelings, which would have normally brought about a
real, transparent, corruption-free, efficient market economy are vented
and deflected.
The IMF money in Russia encourages corrupt and inefficient spending
because it cannot really be controlled and monitored. The rule is: the
more resources the Federal and regional governments have - the more
will be lost to corruption and inefficiency. The IMF cannot rationalize
spending in Russia because its control mechanisms are flawed: they rely
too heavily on local, official input and they are remote (from
Washington). They are also underfunded.
Despite these shortcomings, the IMF assumed - and not only in the case
of Russia - two roles which were not historically allocated to it. It
became a country credit risk-rating agency. The absence of an IMF seal
of approval could - and usually does - mean financial suffocation.
Russia experienced it last month. No banks or donor countries extend
credit to a country lacking the IMF's endorsement. On the other hand,
as authority (to rate) shifted - so did responsibility. The IMF became
a super-guarantor of the debts of both the public and private sectors.
This encourages irresponsible lending and investments ("why worry, the
IMF will bail me out in case of default"). This is the "Moral Hazard":
the safety net is fast being transformed into a licence to gamble. The
profits accrue to the gambler - the losses to the IMF. This does not
encourage prudence or discipline. There is no better example than the
bloated and wrongly priced Russian market for short-term government
obligations, the GKOs.
The IMF is too restricted in both its ability to operate and in its
ability to conceptualise and to innovate. It, therefore, resorts to
prescribing the same medicine of austerity to all the sovereign
patients, which are suffering from a myriad of economic diseases. And
it is doing so with utter disregard and ignorance of the local social,
cultural (even economic) realities. Add to this the fact that the IMF's
ability to influence the financial markets in an age of globalisation
is dubious (the daily turnover in the foreign exchange markets alone is
6 times the total resources of the IMF). The result is fiascos like
South Korea and Indonesia where 40-60 billion USD aid packages was
consumed by sick economies in days to no avail. More and more, the IMF
looks anachronistic and its goals untenable. The IMF also displays the
whole gamut of problems which plague every bureaucratic institution:
discrimination (why help Mexico, which shares a border with the USA and
not Bulgaria, which doesn't?), politicisation (South Korean and
Indonesian officials complained that the IMF officials tried to
surreptitiously introduce trade concessions to the USA into an
otherwise financial package of measures) and too much red tape.
The problem is that the IMF forces governments to restrict flows of
capital and goods, and to reduce budget and balance of payments
deficits. Consequently, governments find themselves caught between
non-compliance with the IMF performance criteria - and addiction to its
assistance. The crusader-economist Michel Chossudowski wrote once that
the IMF's adjustment policies "trigger the destruction of whole
economies". This looks a trifle overblown. But the process that he
describes is, to some extent, true and fully applicable to Russia.
The inevitable devaluation of the Rouble (supposed to encourage exports
and stabilize the currency) will lead to increased inflation. The
higher prices will burden businesses and increase their default rates.
The banks will increase their interest rates to compensate for higher
risks and for inflation. Wages in Russia are never fully indexed or
paid timely so the purchasing power of households will be further
eroded. Despite recent posturing, tax revenues will fall as a result of
a decrease in wages and the collapse of many businesses. Thus, the
budget will be either cruelly cut or the budget deficit will increase.
The options of raising taxes or improving the collection methods are
fantastic in the chaotic environment euphemistically known as the
Russian Economy. The Rising costs of manufacturing (fuel and freight
are denominated in foreign currencies and so do many of the tradable
inputs) will lead to the pricing out of the local markets of many local
firms. A flood of cheaper imports will ensue. The comparative
advantages of Russia will disappear as it slides into ever growing
trade deficits. Finally, The Russians believe, Western creditors will
take over the national economic policy. Communism will be replaced by
IMF-ism. No country is independent if the strings of its purse are held
by others. Russians, too nationalistic to acquiesce, will rebel. The
price will be partly paid by the likes of the Prague Stock Exchange.
(Article published October 2, 1998 in "The New Presence")
Return
Foreigners do not Like Russia
Russia's New Economy
With no Russian in sight, foreigners like to belittle and mock Russia.
"It is a criminal gangland" (an American term which better fits Italy),
"corrupt" (Belgium is more corrupt), "bureaucratic" (try Germany). They
point to its 160 billion USD in foreign debt. But this is one of the
lowest rates in the world (c. 40% of GDP). The USA owes almost twice as
much per its GDP.
Foreigners do not like Russia. Russia should stop relying on them so
heavily. Not because of nationalistic reasons. Because of realistic
ones. It is not realistic to expect foreign institutions and lenders
(such as the IMF) to provide Russia with another 45 billion roubles. It
was the IMF that de-monetised the Russian economy. Its outlandish
demands to limit the money supply reduced the amount of roubles in
circulation to a dangerous, life-threatening, level (15% of GDP). The
result was an unprecedented barter economy (more than 75% of all
transactions) and a collapse of the popular trust in the rouble.
There has never been a post-communist "Russian Economy". There was a
"Moscow Economy" and a "Rest of Russia Economy". The first was a bubble
of consumption, novelty seeking, vanity and financial assets. The
"crisis" in August was merely the bursting of the MUSCOVITE bubble. How
come I consider this to be good for Russia?
First, it will weed out the weak economic players. Shady companies, the
manufacturers of shoddy goods, financial leeches and parasites - all
will vanish together with easy, corrupt and criminal money. Foreign
firms, which came over to ride the wave of unbridled consumerism and to
make a quick buck, will go home. The export revenues of oligarchs and
robber barons will revert back to the nation. In time, their
inefficient and corrupt fiefdoms and monopolies will crumble. They may
even begin to pay taxes.
Multinationals committed to the still promising Russian market will not
go away. They will invest more and provide even more credits to local
suppliers and partners. They will hire good staff, reduce costs and
finally acknowledge the existence of life (and markets) outside Moscow.
The crisis in Moscow is blessing for the rest of Russia, as has often
been the case in history.
This is also the chance of domestic industry and services. With
unemployment up, wage costs are down by half. So are rent and security
costs and other overhead. Many good people are available today at a
reasonable price. Companies have rationalized, cut the fat, sacked
unneeded people, become lean and mean. They are fast becoming
competitive in their own markets and, later on, perhaps, in export
markets.
Additionally, imports are down by 45%. Domestic firms face much less
competition, on the one hand, and less choosy clients, on the other
hand. This is their chance to capture market share. Russian businesses
are used to operating without a banking system, or in hyperinflation.
Foreigners are not. Shops will prefer to stock cheaper domestically
produced goods. Both product quality and the attention to the
consumer's needs and demands need to improve. But the prize is
enormous: control of the Russian market.
But is there a Russian market? This is the only cloud in the silver
lining. Russia is being regionalized, broken down. The movement of both
people and goods is gradually restricted. The fragmentation of a
hitherto unified market is detrimental. This is the real risk facing
Russia. Whatever the POLITICAL arrangements - the economy must remain
united. The various oblasts, mini-states and fiefdoms are simply not
economically viable on their own.
(Article published November 23, 1998 in "The New Presence")
Return
IMF - Kill or Cure
This was the title of the cover page of the prestigious magazine, "The
Economist" in its issue of 10/1/98. The more involved the IMF gets in
the world economy - the more controversy surrounds it. Economies in
transition, emerging economies, developing countries and, lately, even
Asian Tigers all feel the brunt of the IMF recipes. All are not too
happy with it, all are loudly complaining. Some economists regard this
as a sign of the proper functioning of the International Monetary Fund
(IMF) - others spot some justice in some of the complaints.
The IMF was established in 1944 as part of the Bretton Woods agreement.
Originally, it was conceived as the monetary arm of the UN, an agency.
It encompassed 29 countries but excluded the losers in World War II,
Germany and Japan. The exclusion of the losers in the Cold war from the
WTO is reminiscent of what happened then: in both cases, the USA called
the shots and dictated the composition of the membership of
international organization in accordance with its predilections.
Today, the IMF numbers 182 member-countries and boasts "equity" (own
financial means) of 200 billion USD (measured by Special Drawing
Rights, SDR, pegged at 1.35 USD each). It employs 2600 workers from 110
countries. It is truly international.
The IMF has a few statutory purposes. They are splashed across its
Statute and its official publications. The criticism relates to the
implementation - not to the noble goals. It also relates to turf
occupied by the IMF without any mandate to do so.
The IMF is supposed to:
A. Promote international monetary cooperation;
B. Expand international trade (a role which reverted now to the
WTO);
C. Establish a multilateral system of payments;
D. Assist countries with Balance of Payments (BOP) difficulties
under adequate safeguards;
E. Lessen the duration and the degree of disequilibrium in the
international BOPS of member countries;
F. Promote exchange rate stability, the signing of orderly
exchange agreements and the avoidance of competitive exchange
depreciation.
The IMF tries to juggle all these goals in the thinning air of the
global capital markets. It does so through three types of activities:
Surveillance
The IMF regularly monitors exchange rate policies, the general economic
situation and other economic policies. It does so through the (to some
countries, ominous) mechanism of "consultation" (with the countries'
monetary and fiscal authorities). The famed (and dreaded) World
Economic Outlook (WEO) report amalgamates the individual country
results into a coherent picture of multilateral surveillance.
Sometimes, countries, which have no on-going interaction with the IMF
and do not use its assistance do ask it to intervene, at least by way
of grading and evaluating their economies. The last decade saw the
transformation of the IMF into an unofficial (and, incidentally,
non-mandated) country credit rating agency. Its stamp of approval can
mean the difference between the availability of credits to a given
country - or its absence. At best, a bad review by the IMF imposes
financial penalties on the delinquent country in the form of higher
interest rates and charges payable on its international borrowings.
The Precautionary Agreement is one such rating device. It serves to
boost international confidence in an economy. Another contraption is
the Monitoring Agreement, which sets economic benchmarks (some say,
hurdles) under a shadow economic program designed by the IMF. Attaining
these benchmarks confers reliability upon the economic policies of the
country monitored.
Financial Assistance
Where surveillance ends, financial assistance begins. It is extended to
members with BOP difficulties to support adjustment and reform policies
and economic agendas. Through 31/7/97, for instance, the IMF extended
23 billion USD of such help to more than 50 countries and the
outstanding credit portfolio stood at 60 billion USD. The surprising
thing is that 90% of these amounts were borrowed by relatively well-off
countries in the West, contrary to the image of the IMF as a lender of
last resort to shabby countries in despair.
Hidden behind a jungle of acronyms, an unprecedented system of
international finance evolves relentlessly. They will be reviewed in
detail later.
Technical Assistance
The last type of activity of the IMF is Technical Assistance, mainly in
the design and implementation of fiscal and monetary policy and in
building the institutions to see them through successfully (e.g.,
Central Banks). The IMF also teaches the uninitiated how to handle and
account for transactions that they are doing with the IMF. Another
branch of this activity is the collection of statistical data - where
the IMF is forced to rely on mostly inadequate and antiquated systems
of data collection and analysis. Lately, the IMF stepped up its
activities in the training of government and non-government (NGO)
officials. This is in line with the new credo of the World Bank:
without the right, functioning, less corrupt institutions - no policy
will succeed, no matter how right.
From the narrow point of view of its financial mechanisms (as distinct
from its policies) - the IMF is an intriguing and hitherto successful
example of international collaboration and crisis prevention or
amelioration (=crisis management). The principle is deceptively simple:
member countries purchase the currencies of other member countries
(USA, Germany, the UK, etc.). Alternatively, the draw SDRs and convert
them to the aforementioned "hard" currencies. They pay for all this
with their own, local and humble currencies. The catch is that they
have to buy their own currencies back from the IMF after a prescribed
period of time. As with every bank, they also have to pay charges and
commissions related to the withdrawal.
A country can draw up to its "Reserve Tranche Position". This is the
unused part of its quota (every country has a quota which is based on
its participation in the equity of the IMF and on its needs). The quota
is supposed to be used only in extreme BOP distress. Credits that the
country received from the IMF are not deducted from its quota (because,
ostensibly, they will be paid back by it to the IMF). But the IMF holds
the local currency of the country (given to it in exchange for hard
currency or SDRs). These holdings are deducted from the quota because
they are not credit to be repaid but the result of an exchange
transaction.
A country can draw no more than 25% of its quota in the first tranche
of a loan that it receives from the IMF. The first tranche is available
to any country, which demonstrates efforts to overcome its BOP
problems. The language of this requirement is so vague that it renders
virtually all the members eligible to receive the first instalment.
Other tranches are more difficult to obtain (as Russia and Zimbabwe can
testify): the country must show successful compliance with agreed
economic plans and meet performance criteria regarding its budget
deficit and monetary gauges (for instance credit ceilings in the
economy as a whole). The tranches that follow the first one are also
phased. All this (welcome and indispensable) disciplining is waived in
case of Emergency Assistance - BOP needs which arise due to natural
disasters or as the result of an armed conflict. In such cases, the
country can immediately draw up to 25% of its quota subject only to
"cooperation" with the IMF - but not subject to meeting performance
criteria. The IMF also does not shy away from helping countries meet
their debt service obligations. Countries can draw money to retire and
reduce burdening old debts or merely to service it.
It is not easy to find a path in the jungle of acronyms, which sprouted
in the wake of the formation of the IMF. It imposes tough guidelines on
those unfortunate enough to require its help: a drastic reduction in
inflation, cutting back imports and enhancing exports. The IMF is
funded by the rich industrialized countries: the USA alone contributes
close to 18% to its resources annually. Following the 1994-5 crisis in
Mexico (in which the IMF a crucial healing role) - the USA led a round
of increases in the contributions of the well-to-do members (G7) to its
coffers. This became known as the Halifax-I round. Halifax-II looks all
but inevitable, following the costly turmoil in Southeast Asia. The
latter dilapidated the IMF's resources more than all the previous
crises combined.
At first, the Stand By Arrangement (SBA) was set up. It still operates
as a short-term BOP assistance financing facility designed to offset
temporary or cyclical BOP deficits. It is typically available for
periods of between 12 to 18 months and released gradually, on a
quarterly basis to the recipient member. Its availability depends
heavily on the fulfilment of performance conditions and on periodic
program reviews. The country must pay back (=repurchase its own
currency and pay for it with hard currencies) in 3.25 to 5 years after
each original purchase.
This was followed by the General Agreement to Borrow (GAB) - a
framework reference for all future facilities and by the CFF
(Compensatory Financing Facility). The latter was augmented by loans
available to countries to defray the rising costs of basic edibles and
foodstuffs (cereals). The two merged to become CCFF (Compensatory and
Contingency Financing Facility) - intended to compensate members with
shortfalls in export earnings attributable to circumstances beyond
their control and to help them to maintain adjustment programs in the
face of external shocks. It also helps them to meet the rising costs of
cereal imports and other external contingencies (some of them arising
from previous IMF lending!). This credit is also available for a period
of 3.25 to 5 years.
1971 was an important year in the history of the world's financial
markets. The Bretton Woods Agreements were cancelled but instead of
pulling the carpet under the proverbial legs of the IMF - it served to
strengthen its position. Under the Smithsonian Agreement, it was put in
charge of maintaining the central exchange rates (though inside much
wider bands). A committee of 20 members was set up to agree on a new
world monetary system (known by its unfortunate acronym, CRIMS). Its
recommendations led to the creation of the EFF (extended Financing
Facility), which provided, for the first time, MEDIUM term assistance
to members with BOP difficulties, which resulted from structural or
macro-economic (rather than conjectural) economic changes. It served to
support medium term (3 years) programs. In other respects, it is a
replica of the SBA, except that that the repayment (=the repurchase, in
IMF jargon) is in 4.5-10 years.
The 70s witnessed a proliferation of multilateral assistance programs.
The IMF set up the SA (Subsidy Account), which assisted members to
overcome the two destructive oil price shocks. An oil facility was
formed to ameliorate the reverberating economic shock waves. A Trust
Fund (TF) extended BOP assistance to developing member countries,
utilizing the profits from gold sales. To top all these, an SFF
(Supplementary Financing Facility) was established.
During the 1980s, the IMF had a growing role in various adjustment
processes and in the financing of payments imbalances. It began to use
a basket of 5 major currencies. It began to borrow funds for its
purposes - the contributions did not meet its expanding roles.
It got involved in the Latin American Debt Crisis - namely, in problems
of debt servicing. It is to this period that we can trace the emergence
of the New IMF: invigorated, powerful, omnipresent, omniscient, mildly
threatening - the monetary police of the global economic scene.
The SAF (Structural Adjustment Facility) was created. Its role was to
provide BOP assistance on concessional terms to low income, developing
countries (Macedonia benefited from its successor, ESAF). Five years
later, following the now unjustly infamous Louvre Accord, which dealt
with the stabilization of exchange rates), it was extended to become
ESAF (Extended Structural Adjustment Facility). The idea was to support
low-income members, which undertake a strong 3-year macroeconomic and
structural program intended to improve their BOP and to foster growth -
providing that they are enduring protracted BOP problems. ESAF loans
finance 3-year programs with a subsidized symbolic interest rate of
0.5% per annum. The country has 5 years grace and the loan matures in
10 years. The economic assessment of the country is assessed quarterly
and biannually. Macedonia is only one of 79 countries eligible to
receive ESAF funds.
In 1989, the IMF started linking support for debt reduction strategies
of member countries to sustained medium term adjustment programs with
strong elements of structural reforms and with access to IMF resources
for the express purposes of retiring old debts, reducing outstanding
borrowing from foreign sources or otherwise servicing debt without
resorting to rescheduling it. To these ends, the IMF created the STF
(Systemic Transformation Facility - also used by Macedonia). It was a
temporary outfit, which expired in April 1995. It provided financial
assistance to countries, which faced BOP difficulties, which arose from
a transformation (transition) from planned economies to market ones.
Only countries with what were judged by the IMF to have been severe
disruptions in trade and payments arrangements benefited from it. It
had to be repaid in 4.5-10 years.