PRETORIA, South Africa, July 05 (IPS) – The recent protests in Kenya are a warning that the International Monetary Fund (IMF) is failing. The public believes that the IMF is not helpful in managing the economic and financial problems of its member countries, a situation that is being exacerbated by the rapidly changing global political economy.
Of course, the IMF is not the only reason Kenya has had trouble meeting its substantial debt obligations and raising funds to address its budget deficit. Other causes include the ruling class’s failure to tackle corruption, spend public finances responsibly, and manage the economy in a way that creates jobs and improves the living standards of Kenya’s young population.
The country has been hit hard by droughts, floods and locust swarms in recent years, and creditors continue to demand repayment of its massive foreign debt despite domestic difficulties and a difficult international financial and economic environment.
The IMF has offered Kenya financial assistance, but the funding comes with stringent conditions that suggest debt obligations outweigh the needs of long-suffering citizens. This is despite the IMF insisting that its mandate now includes helping the country address issues such as climate, digitalization, gender, governance and inequality.
Unfortunately, Kenya is not an isolated case. Twenty-one African countries are receiving IMF support. In Africa, debt service on average exceeds the total government spending on health, education, climate and social services.
The harsh conditions of IMF financing have led citizens of Kenya and other African countries to conclude that the IMF is too powerful and that this is the cause of their problems. But my research into the laws, politics, and history of international financial institutions suggests otherwise. The real problem is the decline of the IMF’s authority and effectiveness.
A look at some history may help explain this problem and offer a partial solution.
history
When the IMF’s founding treaty was negotiated 80 years ago, the IMF was expected to have resources equivalent to about 3% of global GDP. It helped 44 countries solve their currency and balance of payments problems. Today, the IMF is expected to help 191 member countries solve their fiscal, monetary, financial and foreign exchange problems, as well as “new” problems such as climate, gender and inequality.
To fulfill this responsibility, member countries have provided the IMF with resources equivalent to about 1 percent of global GDP.
The decline in resources relative to the size of the world economy and the number of member countries has at least two detrimental effects.
The first is that member countries are providing less financial support than is necessary to meet the needs of their citizens and to meet their legal obligations to creditors and citizens. As a result, the IMF remains a purveyor of austerity policies. If the IMF had sufficient resources, countries would have to make deeper spending cuts than necessary.
The second effect of the resource reduction is that it weakens the negotiating power of the IMF in managing sovereign debt crises. This is important because the IMF plays a key role in these crises. It helps determine when a country needs debt relief or forgiveness, how big the gap is between the country’s fiscal obligations and available resources, how much the IMF will contribute to filling this gap, and how much other creditors should contribute.
When Mexico announced in 1982 that it would not be able to meet its debt obligations, the IMF said it would provide about a third of the money Mexico needed to meet its obligations, with commercial creditors contributing the rest. The IMF was able to force creditors to reach an agreement with Mexico within a few months. The IMF had ample resources to replicate this in other developing countries in Latin America and Eastern Europe.
The conditions imposed by the IMF in exchange for financial assistance to Mexico and other debtor countries created serious problems for these countries. Nevertheless, the IMF was an effective actor in the debt crisis of the 1980s.
Today, the IMF cannot play such a decisive role. For example, the IMF has provided less than 10% of the funds needed by Zambia. Zambia has defaulted on its debt for four years and has not yet reached a restructuring agreement with all its creditors, despite the support of the IMF.
What should I do?
To solve this problem, rich countries must provide enough finance for the IMF to carry out its mission, and they must also give up some control and make the organization more democratic and accountable.
In the short term, the IMF can take two actions.
First, the IMF should establish detailed policies and procedures that explain to its staff, member countries, and the people of those countries what the IMF can and will do. These policies should clarify the criteria the IMF will use to decide when and how to integrate climate, gender, inequality, and other social issues into its operations.
It also must explain who the IMF will consult with, how external actors can interact with the IMF, and what procedures it will follow to design and implement its operations. In fact, there are international norms and standards that the IMF can use to develop principled and transparent policies and procedures.
Second, the IMF must recognize that the problems raised by its expanded mandate are complex and the risks of mistakes are high.
The IMF therefore needs mechanisms to identify mistakes, address their negative impacts in a timely manner, and help prevent similar mistakes from happening again.
Simply put, the IMF should create an independent accountability mechanism, such as an external ombudsman, to which complaints can be addressed.
The IMF is currently the only multilateral financial institution without such a mechanism, and therefore lacks the means to identify and still correct unexpected problems in its operations, and to learn about the impacts of its operations on the communities and people it is supposed to help.
Danny Bradlow Professor/Senior Research Fellow at the Centre for Academic Advancement, University of Pretoria.
source: conversation
https://theconversation.com/imf is failing in countries like Kenya, why and what can be done about it 233825
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