Yves here. We’ve regularly pointed out that the Fed is indifferent to the effect of its interest rate policies on other nations, particularly poor ones. Even though this post fingers the Fed, it focuses on IMF malpractice of imposing surcharges on debtor countries despite evidence that these levies are counterproductive and punitive.
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Jomo’s website
With the US Fed raising interest rates, the world economy is slowing as debt distress spreads across the global South, increasing poverty worldwide to pre-pandemic levels, with the poorest countries faring worst.
Extreme poverty continues to be high and is now worse than before the pandemic in low-income countries (LICs) and among those affected by fragility, violence and conflict. The promise of eradicating poverty worldwide by 2030 has become unachievable.
The Bretton Woods institutions’ (BWIs) annual meetings in Marrakech in October were only the second-ever in Africa. But the rich nations-dominated BWIs failed yet again to rise to the challenges of our times, setting Africa and the global South even further back.
Instead of fostering cooperation to address the causes and effects of the contemporary catastrophe, neither the International Monetary Fund nor the World Bank governors could agree on joint communiques due to the greater politicisation of multilateral fora.
Indebtedness Immobilises Governments
Indebtedness and restrictive creditor rules prevent governments from spending more counter-cyclically to overcome the many contractionary tendencies of recent times, besides preventing them from addressing looming social and environmental crises.
The G20’s largest twenty economies have urged strengthening “multilateral coordination by official bilateral and private creditors … to address the deteriorating debt situation and facilitate coordinated debt treatment for debt-distressed countries”.
But its Common Framework to restructure debt has been roundly criticised by civil society, think tanks and even the World Bank on many grounds, including the paltry concessional credit relief offered to a few of the very poorest countries.
In contrast, the G24 caucus of developing countries at the BWIs has emphasised the need for “durable debt resolution measures while collaborating on resolving the structural issues leading to such vulnerabilities.”
But all those advocating purported solutions are not even trying to ensure fiscal space and public spending capacity for counter-cyclical efforts, let alone achieve the Sustainable Development Goals and national development objectives.
Surcharges
The IMF currently imposes additional charges on countries that do not quickly clear their debts to the Fund. Besides the usual fees and interest, borrowing countries paid over $4 billion in such surcharges in 2020-22, during the COVID-19 pandemic.
Surcharges will cost debt-distressed countries about $7.9 billion over six years. The G24 has emphasised that surcharges are pro-cyclical and regressive, especially with monetary tightening.
Governments have undertaken contractionary policies and cut imports for lack of foreign exchange. This deepens the problems of heavily indebted poor countries who cannot but count on the Fund for relief and solutions.
At Marrakech, the governing International Monetary and Financial Committee decided to “consider a review of surcharge policies”. The G24 called for “a suspension of surcharges while the review – which we hope will lead to substantial permanent reduction or complete elimination – is being conducted.”
Rich nations have been divided over surcharges. With Ukraine now among the top surcharge payers, following civil society criticisms, the Biden administration’s refusal to review surcharges in 2022 was heavily criticised by the US Congress.
Deepening Austerity
IMF fiscal austerity measures of the 1980s returned with a vengeance after the 2008 global financial crisis, and then again during the Covid-19 pandemic from 2020. Most Fund loans require cutting the public sector wage bill (PSWB), the budget line to pay employees.
Most wage earners in many LICs, including nurses, teachers and other social service workers, work for the state, directly or indirectly. Although much needed, these employees have been more likely to be targeted by such budget cuts.
PSWB cuts may involve hiring or wage freezes, or limiting, or even cutting wages. These inevitably undermine government capacities and services. Fiscal consolidation has also involved raising more indirect, consumption taxes, and tax exemptions, e.g., for essential goods such as food.
In 38 countries with over a billion people, loan conditionalities during 2020-22, the three years of the Covid-19 pandemic, meant regressive tax reforms and public spending cuts. PSWB and fuel or electricity subsidy cuts are also common demands worsening economic contractions.
Austerity Bound to Fail
But the IMF’s own research suggests such austerity policies are generally ineffective in reducing debt, their ostensible purpose. The April 2023 IMF World Economic Outlook acknowledged austerity programmes and fiscal consolidations “do not reduce debt ratios, on average”. Yet, its Fiscal Monitor still demands “fiscal tightening” of most developing countries.
The new IMF-World Bank debt sustainability framework sets the LICs’ external debt-to-GDP ratio limit at 30% or 40%. It insists debt-distressed economies must have lower ratios than ‘strong’ countries, effectively further penalising the weak and vulnerable.
Instead of enabling consistently counter-cyclical macroeconomic frameworks, the IMF’s current short-termist approach is mainly preoccupied with annual, or worse, quarterly balances, mimicking corporate reporting practices.
Such short-termism further limits fiscal space, effectively preventing or deterring public sector investments requiring longer-term macroeconomic frameworks to realise benefits. This discourages ‘patient’ medium- to long-term investments required for national economic planning and transformation, essential for sustainable development.
Restrictive debt and fiscal targets have meant even less public investment. This is typically required of borrowing countries as a credit conditionality. Annual IMF Article IV consultations cause other countries to also accept similar constraints to avoid Fund disapproval.
While a few better-off economies enjoy full employment, most countries face further economic contraction, not least due to interest rate hikes led by the US Fed and their many effects. Instead of being part of the problem, the IMF should be part of the solution.
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IMF policies do exactly what they were intended to do, that is, keep countries from leaving the neoliberal reservation.
The case of Ukraine is most instructive. When the IMF resumed lending to Ukraine in 2014, the IMF first had to put down a revolt from the IMF staff, which correctly pointed out that IMF rules forbade loans to countries which were unlikely to be able to repay.
Of course, the IMF has continued to lend increasing sums to Ukraine, even though Ukraine’s economic position has not exactly improved since 2014.
Rules Based Order!
This is the subject matter Dr. Michael Hudson has explained via interviews and in his writings.
As he has noted before, the US FED seems to be purposely targeting non-western nations who are billions of $$s in debt.
It’s a very heavy crucible for those nations. Dr. Hudson has pointed out, before, that IF some of those nations refuse to keep trying to pay those debts, then the US will institute a “color revolution” and/or oust key political members w/n those nations.
As a result those nations would never achieve “sovereignty.” We find this a very onerous problem for those countries.
Exactly, this must be the “rules-based international order” that the US keeps harping about…
Research offices at the State Department have discovered that the term “rules-based international order” doesn’t resonate with foreign audiences, and in fact produces a negative reaction. But they haven’t come up with an alternative that does any better. My suggestion: “do as we say, not as we do”?
IMF seem to have genuinely clued in staff, but a leadership that is political appointees meant to maintain the Washington consensus.
All in all, the rest of the world exist to feed the gullet of US consumerism.
Does the concept of world credit ever start with a solid foundation and then build on it as necessary? If instead of nitpicking about wages and prices the world ensured that every nation has a minimum of well being? We know what that standard is: food, water, shelter, education, local ecology maintenance, certain useful goods and services. How indebted should anyone be, and for what purpose? And importantly, to whom or what? Where exactly does debt service go? And what sort of token should be used? Our concept of debt is starting to look like just another barbaric and idiotic relic of the ancient past. Lost in translation.
You have to wonder who has their hands in the surcharges.
The IMF has known for decades that austerity harms developing countries. Maddening, just maddening.
Comments on this blog are amongst the best there are. As of course are the articles. Could I add what I know? Michael Chossudovsky’s ‘The Globalisation of Poverty’ is one of the best accounts of how the IMF and the World Bank, ie the Western World, , have conspired over many years to ensure that the developing economies will never succeed. The book leaves the reader angry but enlightened.