Monday, March 30, 2009

Contradiction: IMF’s push for stimulus and contractionary policies

On the one hand, the IMF is calling for fiscal stimulus that should last well beyond 2010. On the other hand, it is also imposing harsh conditionality on governments that borrow money from it. As in previous cases, the conditionality comes in the form of cutting social security spending, wages and other contractionary policies that could potentially disrupt political stability.

Kevin Gallagher argues that the IMF, in its emergency assistance plans for developing countries, is still imposing harsh conditionalities that limit rather than expand government spending. “If the IMF is to receive significantly higher lending authority, it should be forced to abandon its draconian austerity policies, which are more inappropriate than ever in the current crisis,” he argues.

Here is a survey of global stimulus and the IMF’s plans for the crisis.

Pakistan (getting US$7.6 billion):

  • Increase interest rates
  • Cut energy subsidies
  • Reducing fiscal deficit to a more manageable 4.2 percent in 2008/09 and 3.3 percent in 2009/10
  • State Bank Of Pakistan (SBP) will act on monetary policy to build its international reserves, bring down inflation to 6 percent in 2010.
  • SBP to eliminate central bank financing of the government.
  • Increase in expenditure on the social safety net through cash payment and electricity subsidies

Latvia (US$ 17.7 billion):

  • Policies centered around maintaining a pegged exchange rate (to the Euro).
  • Latvia has agreed to keep its budget deficit down in 2009 to below 5.0 percent of GDP and to bring it up to 3.0 percent of GDP in 2011.
  • (Without loans or new financial measures, the deficit would have been an estimated 12 percent of GDP in 2009.)
  • Further conditionalities: immediate 15% reduction in local government employees' wages
  • 30% cut in nominal spending on wages from 2008 to 2009
  • cut in government spending (equal that of 4.5% of GDP)
  • pension freeze and value-added tax increase

Ukraine (US 16.4 billion):

  • Capitalize viable banks, make credit available
  • Target inflation - 17% (2008 inflation was 30%)
  • Reduce budget deficit to 1% of GDP from 2% in 2007
  • Increase social spending with .8% of GDP, but increase energy tariffs
  • *Current account balance deficit is 6% GDP
  • Targets can be adjusted depending on economic evolution