Bullock
The International Monetary Fund (IMF) has received a new lease on life. This derives from the current international financial and economic crisis and the perceived need to distribute financial resources internationally, to moderate and shorten the impact of international economic contraction.
As recently as two years ago, the IMF found itself in desperate circumstances, searching for a role in the international economy and for income earning opportunities with which to pay for itself. This arose because most of its major (and income-generating borrowers), had "graduated" beyond the need for borrowed resources in support of efforts to meet external financing needs.
In this regard, the IMF may have become a victim of its own "success" in that most countries had accepted the need to manage aggregate demand relative to resource availability, contributing to lower inflation and interest rates, to improved fiscal and public debt indicators and to improvements in external accounts and official foreign reserve balances.
IMF redefining itself
The international crisis has addressed (at least for the time being) the IMF problems of defining a role for itself and of not having enough profit-generating lending opportunities. Even prior to the full development of the current crisis, the IMF had sought to re-examine its previous approach to lending and the negative reaction that this had elicited among its borrowers. It is this critical review that has informed the IMF efforts to redefine its approach to lending.
It is implicit in the new IMF approach that it had been too rigidly dogmatic and detailed on certain policy prescriptions, wrong in some circumstances, and that it had often failed to engage effective participation and programme 'ownership' by the 'beneficiary' economies. The new IMF approach includes the following characteristics:
1. There is more emphasis on the overall coherence and 'quality' of a programme, avoiding the detailed quantitative specification of a large number of targets all of which have to be rigidly observed every quarter. (Jamaica once 'failed' an IMF programme by missing a target for Net International Reserves by approximately US$5 million).
2. There is a preference for countries to "own" and, if technically capable, specify their own economic programme. This is not new for Jamaica as going back as far as the 'tripartite' discussions of 1985-1986, and certainly including its last borrowing programme (the 1992-1995 extended Fund Facility), Government of Jamaica economic technicians have earned tremendous respect from the international financial community.
3. The IMF no longer insists on preconditions for negotiations (things to be done before they even talk to you) and is prepared to accept that there may be more than one route towards an objective.
4. The IMF has retreated from its previous "article of faith" that every balance of payments problem is symptomatic of an overvalued exchange rate and in need of correction by exchange rate depreciation (or "devaluation" in fixed exchange rate systems).
5. The IMF has become less dogmatic in its stance against subsidised interest rates and directed credit. The burden of concern has shifted somewhat from insistence against "distorting the efficiency of market forces" in the allocation of resources, to ensuring that the costs of interest rate subsidies are transparently captured and reported in the public finances.
6. The IMF has long retreated from its position that market forces are automatically and always "good for poor people". There is now explicit interest in human capital (education, skills training and health) "social safety nets" (to protect the poor and socially vulnerable) and in gender issues.
approach to lending unchanged
In at least one important respect, the IMF approach to lending has not changed. A country's capacity to repay debt will ultimately be dependent on its capacity to save. Large excesses of aggregate demand over national production, partly generated by substantial and unpredictable fiscal deficits, will result in balance of payment problems, loss of external reserves and reduced capacity to repay. Capacity to repay is also influenced by how quickly national production and income grow, but this is also dependent on scarce resources being used where they will have the maximum effect in facilitating economic growth.
It is clearly understood that in making loans available, the IMF makes a distinction between those countries that are "pre-qualified" and those that are not. The latter are already operating economic programmes that are fully acceptable to the IMF. The former are not. Jamaica is not 'prequalified'.
As the Government of Jamaica engages the IMF regarding how to become 'qualified', there has been much public discussion about the type of 'conditionality' that is likely to be 'imposed' by the IMF.
This representation of 'imposed' makes lending requirements entirely subject to the whims of an arbitrary and insensitive IMF, apparently not having any basis in Jamaica's own objective economic circumstances and collective responsibility.
dire circumstances
Jamaica's objective circumstances are dire. Major foreign exchange sources have collapsed, the budget as cast is not likely to meet fiscal objectives, and reliance on monetary instead of fiscal adjustment keeps interest rates high and stifles economic activity. Without incremental external financing, the official net international reserves will decline sharply. IMF funding and its "seal of approval" for other funding is not likely to materialise unless Jamaica moves to address the imbalance between income and expenditure, especially in the fiscal accounts. This adjustment may be unavoidably painful. Success will then depend on a socially tolerable sharing of the burden of adjustment, and on an allocation of scarce resources designed to foster economic growth.
With or without IMF funding Jamaica needs to address these issues. The incremental funding can make the process of adjustment more socially manageable and more oriented to economic growth. Unless there is a massive inflow of grant funds, and this is not very likely, Jamaica will need to borrow. In the final analysis, the bank manager has to be satisfied that the borrower has put his house in order such as to facilitate repayment.
Colin F. Bullock is a lecturer in the Department of Economics, University of the West Indies, Mona. Feedback may be sent to columns@gleanerjm.com.