PRETORIA, South Africa, Jul 5 (IPS) – The recent protests in Kenya are a warning that the International Monetary Fund (IMF) is failing. The public does not believe it is helping member states manage their economic and financial problems, which are being exacerbated by a rapidly changing global political economy.
It is certainly true that the IMF is not the only cause of Kenya’s problems in raising the funds to service its substantial debts and address its budget deficit. Other causes include the failure of the ruling class to deal with corruptionto spend government finances operate responsibly and manage an economy that creates jobs and improves the living standards of Kenya’s young people.
The country has also been hit by drought, floods And locust plagues in recent years. Moreover, its creditors demand that it continue to service its large external debts, despite its domestic challenges and a difficult international financial and economic environment.
The IMF has provided financial support to Kenya. But the financing is subject to stringent conditions that suggest debt is more important than the needs of long-suffering citizens. This is despite the IMF claiming that its mandate now also includes helping states deal with issues such as climate, digitalisation, gender, governance and inequality.
Unfortunately, Kenya is not an isolated case. twenty one African countries receive IMF support. In Africa, debt serviceis on average higher than the total amounts that governments spend on health care, education, climate and social services.
The stringent conditions attached to IMF financing have led the citizens of Kenya and other African countries to conclude that an overly powerful IMF is the cause of their problems. However, my research into the law, politics and history of international financial institutions suggests the opposite: the real problem is the decline in the authority and effectiveness of the IMF.
A little history may explain this and provide a partial solution.
The history
When the treaty establishing the IMF was negotiated 80 years ago, it was expected to have resources equivalent to about 3% of global GDP. This was to help solve the monetary and balance of payments problems of 44 countries. Today, the IMF is expected to help its 191 member countries solve fiscal, monetary, financial and currency problems, as well as “new” issues such as climate, gender and inequality.
To meet these responsibilities, member countries have made available to the IMF resources amounting to only about 1% of global GDP.
The decline in resources relative to the size of the world economy and the number of members has at least two damaging consequences.
The first is that it gives its member countries less financial support than they need to meet the needs of their citizens and to meet their legal obligations to creditors and citizens. The result is that the IMF remains a purveyor of austerity policies. It requires a country to make deeper cuts than would be necessary if the IMF had sufficient resources.
The second effect of declining resources is that it weakens the IMF’s bargaining position in managing sovereign debt crises. This is important because the IMF plays a crucial role in such crises. It helps determine when a country needs debt relief or forgiveness, how large the gap is between the country’s financial obligations and its available resources, how much the IMF will contribute to cover that gap, and how much its other creditors should contribute.
When Mexico announced that it could not meet its debt obligations in 1982, the IMF declared that it would provide about one-third of the money Mexico needed to meet its obligations, provided that its commercial creditors would contribute the remaining funds. It was able to persuade the creditors to agree with Mexico within a few months. It had sufficient resources to repeat the exercise in other developing countries in Latin America and Eastern Europe.
The conditions imposed by the IMF on Mexico and other debtor countries in exchange for this financial support created serious problems for these countries. Nevertheless, the IMF was an effective actor in the debt crisis of the 1980s.
Today, the IMF is not able to play such a decisive role. For example, it has yielded less than 10% to Zambia of its financing needs. It has been four years since Zambia defaulted on its debts and even with IMF support it has still not reached restructuring agreements with all its creditors.
What needs to be done?
The solution to this problem requires that rich countries provide the IMF with sufficient financial resources to carry out its mandate. They must also give up some control and make the organization more democratic and accountable.
In the short term, the IMF can take two measures.
First, it must establish detailed policies and procedures that explain to its own staff, to its member states, and to the people of those states what it can and will do. These policies should clarify the criteria the IMF will use to determine when and how to include climate, gender, inequality, and other social issues in IMF operations.
They must also describe who they will consult with, how external actors can work with the IMF, and what process they will follow in designing and implementing their activities. In fact, there are international norms and standards which the IMF can use to develop policies and procedures that are principles-based and transparent.
Second, the IMF must recognize that the issues arising from its expanded mandate are complex and that the risk of error is high.
Therefore, the IMF needs a mechanism that can help it identify errors, address their negative consequences in a timely manner and prevent their recurrence.
In short, the IMF must independent accountability mechanism such as an external ombudsman who can receive complaints.
Currently, the IMF is the only multilateral financial institution without such a mechanism. It therefore lacks the means to identify unforeseen problems in its operations when they can still be corrected and to learn about the impact of its activities on the communities and people it is supposed to help.
Danny Bradlow is Professor/Senior Researcher, Centre for the Advancement of Science, University of Pretoria
Source: The conversation
https://theconversation.com/the-imf-lets-countries-if-kenya-fail-why-and-what-can-be-done-about-it-233825
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