Why is the IMF trying to be an aid agency?

News: There are strong arguments for revamping the financial structure of the IMF.

The International Monetary Fund (IMF) attempting to modify itself into an aid agency, instead of embracing its traditional role of helping troubled debtor countries.

What is the issue with the IMF’s financial structure?

Due to the absence of strict conditionality requirements, the vast bulk of the funding they provide takes the form of outright grants, rather than loans. Some recent cases are,

One, Argentina received a massive $57 billion loan in 2018 with uncharacteristically weak IMF conditions attached and is now resisting repaying.

Two, Unconditional loans to the Nigerian government that is restricting food imports to an under-nourished population. Thereby exacerbating the problems caused by the government’s own exchange-rate controls.

Third, giving approval to countries with exploding debt-to-gross domestic product ratios based on very optimistic assumptions. For instance, the 2021 Article IV report for Ghana is a case in point.

Similarly, providing funds for large emerging markets such as Brazil and South Africa, arguing that dealing with the pandemic is the absolute top priority, despite soaring debt levels, rising inflation.

Consequence of irresponsible lending: Since the IMF is still very much structured as a lending agency, it eventually will have to be repaid or go bankrupt itself.

What is the root cause of such problems?

The root cause lies in its faulty design.

Firstly, the Rapid Financing Instrument, a lending facility that does not require countries to enter into a “full-fledged” adjustment program and that in practice requires few conditions or none at all.

Secondly, it has persuaded its members to approve an emergency issuance of $650 billion in special drawing rights, which also have essentially no conditions. SDRs are basically direct aid that goes to every IMF member, including Russia and Iran.

What are the suggestions to reform the IMF financial structure?

One key condition should be that IMF funds are not used simply to repay private creditors. Forceful IMF conditionality is essential to establish financial stability and ensure that its resources do not end up financing capital flight, repayments to foreign creditors, or domestic corruption.

In a world where private capital flows far outweigh official lending, traditional IMF programs still have a critical role to play in mitigating and managing financial crises.

Source: This post is based on the article “Why is the IMF trying to be an aid agency?” published in Business Standard on 4^th Jan 2022.