Williams

The recent financial crisis that has engulfed the world economy has sparked some debates in Jamaica regarding the government's re-engagement with the International Monetary Fund (IMF). Debates about the IMF in developing countries are usually highly emotive because this institution has had the greatest impact of all the international financial institutions (IFIs) on the financial operations in these countries.

The debate in Jamaica is even more personal given that the current functions of the IMF were actually negotiated in Kingston, Jamaica, in the IMF meeting in 1974, where members agreed to legalise the movement from a fixed to a floating exchange rate system. This change resulted in the IMF changing its role from monitoring exchange rate parities to one of being the lender of last resort to members suffering from balance of payments deficits.

In its role as a lender of last resort, the IMF imposed harsh conditionalities on borrowers to ensure that they repay their debt obligations. The ideology that guided the application of conditionalities is that, if a country is suffering serious deficits in its balance of payments, this would lead to serious imbalances in the economy and result in low growth and lower standard of living for its citizens. To cure this deficit, merely borrowing cash from the IMF will not do. The country will have to make adjustments in its economic management. This would require policies that reduce domestic demand. These policies would include changing the value of the country's currency; reduction of government budget deficits; elimination of government subsidy programmes and, raising of interest rates. It is these conditions that have resulted in the IMF being viewed with great scepticism in developing countries. These conditions were seen as too stringent and also impinging on the sovereignty of the debtor country.

modernised operations

As the global financial crisis deepens and more countries are turning to the IMF for liquidity support, the global financial institution has argued that it has modernised its operations and developing countries need not see it as a villain anymore. Indeed, the Washington Post noted that the IMF reformed its lending policies to make it easier for countries with strong economic policies to borrow more, faster and with fewer strings attached.

The recent G20 meeting in London, England, also saw leaders calling for changes in the IMF policies, focusing on the harsh conditions that the latter places on recipient nations. They told the fund to make its loans more flexible and to give low-income countries more autonomy in disbursing their borrowed money.

flexible terms

The IMF seems to understand the need for more flexible terms in offering loans to developing nations. The new IMF programme, the Flexible Credit Line, was used to replace the short-term liquidity facility introduced in October when the financial crisis had just begun. This latter programme was criticised for being too rigid and offering too little money. This new programme is seen as more flexible in that the IMF stresses its willingness to consult emerging economies while designing the new programme, in order to better meet their needs.

Also, the IMF's managing director, Dominique Strauss-Kahn, recently implied that the IMF's advice will become less ideological and more pragmatic to keep with the times. Hear him speak: "If the fund is considering a country and is technically convinced that privatisation of any enterprise is needed to fix the country today, let's privatise. But if it's a general idea of privatisation that has nothing to do with the problem, let's forget it. At the same time, if nationalisation will help, let's do it." The devil, however, is in the detail. The IMF states clearly that only countries deemed to have weak economic policies will be subject to conditionalities.

Now, by all measures, Jamaica is deemed to have weak economic policies. A surgical analysis of the economy shows that there are serious structural deficiencies in the Jamaican economy. The country's competitiveness has declined year on since 2006, the level of productivity has been declining, the external balances are deteriorating, inflation is rising and the exchange rate is unstable.

facing harsh conditionalities

There is no doubt, therefore, that a re-engagement with the IMF will see the country facing the harsh conditionalities that once made the IMF the villain in developing countries. The IMF is not going to allow countries with weak economic policies to face the same terms and conditions as those with strong economic policies, irrespective of its claim of being transformed from the days of harsh conditionalities. Observers have identified that even with the new mantra of transformation at the IMF, vestiges of the old conditionalities remain.

Critics argued that nine IMF agreements negotiated since September 2008, including with El Salvador, have contained some of the old elements of tough terms and conditions. In these nine agreements, the IMF has imposed conditions, such as fiscal discipline (budget tightening), interest rate increases, wage freezes for public sector employees, etc. These measures will no doubt reduce aggregate demand, which is counter intuitive to what is need in the current financial crisis.

Jamaica, therefore, has to be very cautious as the calls ring louder for it to return to a borrowing relationship with the IMF. If it wants to benefit from the new conditions that the IMF is offering in this time of crisis, it has to show signs of strengthening its economic policies, otherwise, a return to the IMF will not lead to anything new and different. It is better to have these conditions self- imposed than to have them being imposed by an IFI.

Densil A. Williams is a lecturer of International Business in the Department of Management Studies, UWI, Mona. He may be contacted at densilw@yahoo.com. Feedback may also be sentto columns@gleanerjm.com.