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Interview – Christine Lagarde, Managing director, International Monetary Fund
The International Monetary Fund (IMF) cannot win – it is either doing too much or too little for critics’ liking. Once the world’s most powerful financial institution, by the 1970s and 1980s it had become the key arbiter of developing countries’ economic continence. Those governments that defied its precepts were ordered, discreetly or otherwise, to rethink their policies – on pain of exclusion from the league of financially responsible countries.
An eminent Nigerian economist, the late Pius Okigbo, referred to the Fund as “economic sanitary inspectors”. Its remedies, involving sharp cuts to public spending, were blamed for political instability. It was held responsible for a phenomenon in Africa and Latin America known as the ‘IMF coup’.
Today, the dominant critique of the IMF is the converse. From accusing the Fund of doing too much and being too prescriptive, many critics now say it is doing too little and is in danger of losing its global role, eclipsed by weakly regulated international financial markets and the growth of China as the dominant provider of finance to developing economies.
Specifically on Africa, the IMF is accused of taking its eye off the ball over the past decade or more, just after it led an unprecedented effort, known as the Heavily Indebted Poor Countries (HIPC) initiative. The IMF, World Bank and the Paris Club wrote off billions of dollars of debt to some 36 of the poorest economies, of which 30 were in Africa. HIPC deals should have allowed those governments to restart responsible borrowing and to boost production and jobs.
It did not work out like that. Since the financial crisis of 2008 and the ensuing crash in commodity prices, there has been a sharp build-up of debt in poor countries. About 24 out of 60 low-income countries are currently in a debt crisis or at high risk of getting into one. That number has doubled in the past five years.
Against that backdrop, IMF managing director Christine Lagarde speaks to The Africa Report, defending her institution’s role and explaining how it was trying to stop the debt crisis from spreading. She acknowledges the need for a sharp improvement in data collection and working more closely with civil society to feed into more effective national surveillance and lending programmes.
Resolving this new crisis, and stopping more countries from being dragged into its vortex, will draw in many more players than the HIPC scheme. For example, between 2013 and 2016, China’s share of the debt owed by poor countries surpassed the total held by the Paris Club, the World Bank and all the regional development banks, according to Masood Ahmed, president of the Center for Global Development think tank.
In the same period, concessional lending from rich countries to poor economies fell by 20%. Critics add that the IMF and World Bank’s rules on lending were too inflexible, effectively forcing those countries to take on commercial debts with higher interest rates and shorter maturities. And, although the number and range of creditors operating in Africa – from commercial banks to commodity-trading companies – has increased exponentially, Lagarde insists the Fund will still play a leading role in providing policies and finance to steer countries away from the rocks.
TAR: The current global trade and financial environment seems to work against international institutions. What implications do you see for Africa?
CHRISTINE LAGARDE: I see two parallel tracks at the moment. On the one hand, you have this rise of protectionist measures, rise of tariffs, non-tariff barriers, restrictions to trade taking place between certain countries. We are thinking of the US and China, US and Europe, some European countries and China. That’s of concern to those countries but also to African countries.
But you have a parallel track of free-trade arrangements: between the EU and Japan, between Canada and the EU, negotiations between the Mercosur [Southern Common Market] countries and Europe, and the African free trade agreement – an incredibly strong piece of news. It’s not going to lead to development instantly because there’s a long transition period. In terms of countries within the region and countries that are trying to build their supply chains, determining which markets will be driving forces in 10 years’ time, it’s a very strong signal. If we look at the first track – the rise of protectionism and trade restrictions – it will have an indirect impact. If you include the confidence aspect, with rising tit-for-tat reactions, then you get to a more material impact and direct consequences for Africa.
You have said that China’s One Belt, One Road strategy could mean some countries with heavy debt burdens taking on unsustainable projects that don’t address national priorities. Is this a particular risk in Africa?
For any country or any party to be totally dependent on one supplier is a factor of risk. I know the World Bank is trying to design a financial instrument guarantee against past losses in order to incentivise private-sector financiers into infrastructure projects. So diversification by creating financial instruments that can bring the private sector into infrastructure financing in Africa is good and is a factor of risk mitigation. Being mindful of debt sustainability, making sure the financing is transparent and applied to the right projects conducted efficiently – all three components matter.
Today, many are ringing alarms about rising debt and falling per capita growth. With hindsight, do you think those promoting the Africa Rising campaign were reckless or just ill-informed?
It’s true that a lot of people got a bit carried away at the time. I remember in 2014 when we did the Mozambique conference and we decided to have a two-fold approach which was ‘Africa rising’/’Africa watching’. As far back as 2014, we were concerned about the rise of debt, the commodity-price shock and its impact on the continent, where many countries are still growing significantly in terms of population and where gross domestic product (GDP), the headline figures, were all pretty flattering. But I look at the GDP per capita because that’s where it’s going to have an impact on people. If I look at the low-income countries, many of them are in sub-Saharan Africa. We have six which are in debt distress at the moment, and we have nine at high risk of debt distress.
On countries in debt distress, what are the remedies? Will the IMF and World Bank play a leading role in the crisis as they did with the Heavily Indebted Poor Countries initiative in the 1990s and 2000s?
The situation is vastly different from what it was, and the landscape of the creditors is different. In some countries, you have a lot of full-term domestic debt, which is essentially with local banks and not much by way of sovereign bonds. You have countries that have issued significant sovereign bonds in the past 10 years – usually foreign currency denominated, which exposes them to the risk of currency variations and monetary pressures. It’s much more diverse: a combination of private and public-sector creditors. I’m sure we will be called upon to play a role if there is a need for debt restructuring in any of those countries.
In some countries, such as Mozambique and Zambia, the authorities under-reported their country’s debt. And that hits your debt-sustainability analyses. How do you get around that?
It has an impact on the analytical work that we do, on the design of the programmes, and we need to constantly verify, check and double-check the accuracy of the data that we receive. Together with the World Bank, we have taken the initiative of improving the quality of data, being more intrusive than we have been and reconciling more between the incoming data from the debtor countries as well as the data coming from the creditor countries. We presented the first report at the G20 six months ago, and we will be continuing the project to better verify the data. It only takes a few countries to undermine our own confidence in the data that we are using.
How have relations between African states and the IMF changed since the apogee of structural adjustment? Are you less intrusive, more diplomatic with your policy advice?
We try to help countries in the direction of producing sustainable and inclusive growth. So when we say fiscal consolidation is needed, [that means] either raising revenue or cutting unnecessary spending, which is not going to help sustainable growth. Sometimes it leads us to having difficult conversations. If a country is determined to ignore those views, there’s not a lot that I can do to cancel the ordering of a private jet.
But they won’t get the IMF credit.
No, I don’t think so, that would be an undermining of the recommended spending cap.
There are countries such as Ethiopia, Morocco and Rwanda that pursue heterodox and more dirigiste economic policies. They talk about industrial policy, which used to be heresy in the Bank and the Fund. Are relationships with those countries more difficult or just more interesting?
I think it makes our life and our work more interesting, actually. We just finished a programme with Morocco, which has had a precautionary line of credit over the past four years and doesn’t need it going forward. I don’t think the government drew on the line, but it was there and the country was very pleased to have access to that. We had very good discussions on their growth and development policies, both from the fiscal and monetary side.
We have a programme with Rwanda, I think there is still one year to go, with financing. We had a very solid partnership. If you were to ask which country in Africa I would praise now, I would probably say Rwanda. Ethiopia’s new prime minister was visiting [the IMF in late July], and we had a terrific meeting. I visited Ethiopia last January, and we will develop the relationship further. We look at the macroeconomic situation, at the sustainability and stability of the country. If it is reached through slightly different ideologies and policies, it’s not for us to have an ideological veto on any kind of model.
What impact are artificial intelligence and robotics having on the growth and development models used in African economies? Do they rule out these countries following the rapid industrialisation strategies used in Asia?
The Fourth Industrial Revolution is not a protected territory for the economies of Southeast Asia. It will include all countries, and it will not bypass Africa. We will be conducting more work on that. We have a conference coming up in Ghana in December on that topic, the future of work in Africa. Last October, at the time of the IMF’s World Economic Outlook, a study concluded that a country could move from an agriculture-predominant sector to a service-predominant sector without going through each iteration of the secondary [industrial] sectors and without losing the productivity that could be unleashed by the Fourth Industrial Revolution. That’s a really positive development as far as some of the African countries are concerned – that they will not have to go through some of the painful process of industrialisation before they move to the third and the fourth sector.
You see the impact of technological developments in many areas. In agriculture, you see improved yields of crops because of the use of technological devices that inform farmers about the soil. You see access to financing in a much deeper, much broader way thanks to mobile banking. You see transportation more quickly available through the proliferation of applications. I’m not naively optimistic about it, but I think that there are a lot of positive developments [that will be] of benefit to Africa.
This interview first appeared in the September 2018 print edition of The Africa Report magazine