IMF-Africa: debt, SDRs, inequality… the Fund’s new clothes

In depth
This article is part of the dossier: IMF and Africa: Different this time?

By Joël Té-Léssia Assoko
Posted on Friday, 24 December 2021 12:32

"IMF-Africa: is it different this time? (3/5) Faced with the Covid-19 crisis, the multilateral institution has provided noticeable support to African countries that were long critical of it. The question now arises as to its fiscal dogmatism and whether it is taking the climate issue into account.

Technically, no state is obliged to obey the IMF. Similarly, no individual is obliged to undergo chemotherapy… unless he or she really needs it. This is the fundamental dilemma of “this important but unloved institution”, in the words of economist Dani Rodrik, a famous critic of the organisation created in 1945 to “ensure the stability of the global financial system”.

Unlike the World Bank, the IMF is not a development aid or anti-poverty organisation. Its mission is to anticipate financial crises and intervene alongside states facing a rapid deterioration of their external financial and trade position, a deterioration of their foreign exchange reserves and increased monetary and banking instability.

“Under its Articles of Agreement, the IMF can provide its general resources only with adequate safeguards and only to help members resolve their balance of payments problems. Debt sustainability is an essential safeguard for IMF resources,” its staff say.

A functional dichotomy

The Fund’s operations thus take place only in equivocal contexts. Its surveillance and technical assistance activities often go unnoticed, while its most visible interventions take place in emergency situations, where the institution operates with a limited mandate, strict regulatory constraints – it cannot, for example, cancel its debt, but must solicit grants from donors on behalf of debtor countries – and a perceived excessive focus on debt levels.

Since the Covid-19 crisis began, the IMF has supported 86 countries to the tune of more than $110bn, using a variety of instruments. Lending to sub-Saharan Africa last year, for example, was 13 times the annual average of the previous decade.

This functional dichotomy has long been coupled with rigid analytical frameworks and a fair amount of arrogance, particularly noticeable in the 1980s and 1990s, when Washington teams had to deal with more and more crises in the new, non-industrial member countries (the phraseology has since evolved to ‘emerging’, ‘transition’, ‘low- and middle-income’, etc.).

In Africa, this partly explains the profound discrepancy between the continent’s actual share of IMF operations and its prominence in economic thinking as well as controversy.

Period of decline in the 2000s

From a strictly accounting perspective, Africa represents only a minor part of the Fund’s asset portfolio. As of the end of April 2021, loans to African countries through the General Resources Account, the Fund’s main financing window, amounted to about 26 billion special drawing rights (SDRs), or nearly $37bn.

This is barely 30% of total lending under this window and less than Argentina’s 35.54%. Moreover, Egypt alone accounts for half of the African stock of these loans (14.75%).

Vilified for its ‘ultraliberal’ reforms, its ‘Structural Adjustment Programs’ (SAPs) carried out with cuts in public spending, accelerated privatisations and forced liberalisation of economies at the end of the last century, the Fund went through a period of decline in the 2000s, with few interventions, reduced staffing levels and a number of states, including Algeria, swearing never to call on its ‘interventions’ again. The second half of the 1990s is still known as the ‘IMF years’ to South Koreans, who were subjected to a draconian fiscal austerity regime that saw unemployment triple from 2% to nearly 7% between 1996 and 1998.

The regenerative effects of the crisis

Even so, the 70-year-old institution has shown a remarkable capacity for resilience and reinvention, albeit within a limited framework. The subprime crisis of 2007-2008 gave it a new lease on life.

Under the leadership of Dominique Strauss-Kahn, and in a context of real panic about the stability of the global financial system, the G20 countries, its main shareholders, approved new rapid intervention mechanisms and allocated, in 2009, nearly $182bn in SDRs to help governments face the crisis.

In many ways, the Covid-19 pandemic had the same regenerative impact on the institution that Bulgarian Kristalina Georgieva has been piloting since October 2019.

“Since the Covid-19 crisis began, the IMF has supported 86 countries to the tune of more than $110bn, using a variety of instruments. Lending to sub-Saharan Africa last year, for example, was 13 times the annual average of the previous decade,” Georgieva’s staff say.

A Fund that is bold and quick in its support

It is precisely on this aspect of ‘rapid’ credits that the Fund’s action has been most remarkable. These credits, disbursed in tranches and at concessional rates, are intended to counter sudden exogenous shocks. They are accounted for outside ‘general resources’ and deployed under more flexible conditions, notably through the Poverty Reduction and Growth Trust (PRG Trust).

Another precursor was the IMF’s acceptance of principles such as the industrialisation of Africa, regional integration and structural transformation.

Credit extended through this window amounted to $17.9bn as of April 2021, up 26% year over year. About 75% of these resources went to African countries, led by Ghana, Côte d’Ivoire, Kenya, Cameroon, and Madagascar.

“The IMF has been particularly bold and quick in its response and support. It provided debt service relief in 2020 to its most vulnerable members, including 22 African countries, and recently extended its support under the program through October 2021. In addition, the IMF board’s decision to allocate SDRs will evenly strengthen the reserves of all members and further reduce the pressure on the balance of payments,” said Hippolyte Fofack, chief economist of the African Export-Import Bank.

Neoliberal orthodoxy questioned

The approximately $650bn in SDRs approved by the Fund and the rapid credits granted are already having a palpable effect in several countries on the continent. For example, the DRC has seen its foreign exchange reserves rise by more than 60% in two months, to $3.36bn in mid-September, thanks in particular to an injection of about $1.5bn in SDRs, allowing the country to gain five years on the timetable for building up its foreign exchange stock.

“This will help change the external perception and will allow foreigners to have a more nuanced view of the country,” says the representative of an international bank very active in the DRC.

“There is no doubt that during the crisis, the IMF demonstrated unusual agility and added to its policies considerations in favor of a less restricted agenda. There were warning signs. When [Frenchman] François Bourguignon was chief economist [of the World Bank], he expressed doubts about certain precepts of neoliberal orthodoxy, such as inflation targeting and ‘optimal’ levels of public deficit, but the machine did not follow him,” says Carlos Lopes, former executive secretary of the Economic Commission for Africa.

A more humble and open approach

In 2011, in a devastating report on the IMF’s failure to anticipate the 2007-2008 global financial crisis – the central focus of its mandate – the Fund’s independent evaluation office blasted “a high degree of groupthink,” “incomplete analytical approaches,” “weak internal governance,” “an insular culture” and “political constraints.” A paper from the highly orthodox European Central Bank noted, at the end of 2019, “a negative correlation between the number of conditions and the achievement of public policy objectives, while macroeconomic performance has generally been below expectations”.

These criticisms from authoritative circles and sometimes from within the organisation itself have undoubtedly helped to challenge certain preconceptions and promote a more humble and open approach to social issues. For example, according to our count, between 1997 and 2011, the word ‘inequality’ appeared only 28 times in the title of research articles published by the IMF. Between 2012 and 2021, it appeared no less than 78 times.

“Another precursor was the IMF’s acceptance of principles such as the industrialisation of Africa, regional integration and structural transformation,” says Carlos Lopes. The latter notes the energy driven by Georgieva and the IMF’s new chief economist, Gita Gopinath, an American-Indian who came to the Fund from Harvard in January 2019 and will return there at the beginning of 2022.

The debate Washington avoids

However, “Africans are still bound by principles and a financial system that assesses their economies as being in distress when they receive the least amount of capital and when truly concessional financing (that is, financing at interest rates of 1% or less) is almost completely channeled to rich countries. This is the debate that is being avoided in Washington”, says Carlos Lopes, who is currently working on the project. Carlos Lopes, now a professor at the University of Cape Town and at Sciences Po Paris, castigates.

However, despite the criticism it has received, some, like Mark Plant of the Center for Global Development, believe that the accumulated expertise and adaptability that the IMF has shown in times of crisis make it the best placed actor to add a new string to its bow: the fight against climate change.

Last May, the Fund announced a plan to include climate-related risks, but also inequalities, demographics and digital technology developments. In early October, an IMF task force advocated for a share of SDRs to be directed to a new Resilience and Sustainability Fund (RST). “With conditionality, of course…” says Lopes, implacably.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options
Also in this in Depth:

IMF-Africa: Is it different this time?

Vilified and reviled just a few years ago, the IMF now appears to be an ally of African countries, from the moratorium on their debts to emergency aid in the face of Covid-19. But old habits die hard. Has the IMF really changed?

IMF/Africa: The post-Georgieva candidate hunt has already begun

"IMF-Africa: is it different this time ?" (1/5) Supported by Europe and Africa, IMF managing director, Kristalina Georgieva, has saved her seat. Behind the scenes, some continue to protest, while others prepare the next step.

Abebe Aemro Selassie: “Africa has changed. So has the IMF!”

Transparency, debt, investments... The director of the Africa Department of the International Monetary Fund analyses the relationship between the Washington institution and the continent.

‘Vaccine policy is economic policy’ – IMF MD Kristalina Georgieva

The International Monetary Fund managing director Kristalina Georgieva says the IMF spent nearly $300bn in resuscitating the global economy when Covid-19 struck. There are unorthodox noises being made at the top of the institution best known for austerity in public spending. What comes next as rich countries bounce back and poor countries stay on the mat? And will the IMF run out of money? An exclusive interview with the head of the IMF.

Hakim Ben Hammouda: ‘Facing the IMF, we must not accept an impossible agreement’

African nations often experience - painfully - the scanning of their economies by teams in Washington. The former Tunisian Minister of Finance gives governments some insights into how to face the institution.