The conclusion of the recent G20 summit in London saw a range of polices and promises made in order to provide global and concrete solutions in the challenges of the financial crisis. Although the meeting included only the richest states in the world, they did not shrink from their responsibility to provide for the poorest. In order to prevent the financial crisis which is now being felt in the West from spreading to less developing countries and causing far greater economic and social hardship, the G20 agreed to substantially increase the financing of the International Monetary Fund (IMF). Dominique Strauss-Kahn, managing director of the fund, lauded this move as, “a powerful signal that the international community is committed to supporting these countries.” A statement released by the London Summit 2009 details the new extensions of credit made available to the IMF. $750 billion will be made available over the next few years by the leading countries, together with an immediate injection of $250 billion of special drawing rights, additional allowances for trade finance and a sale of IMF gold will bring the total new funding to $1.1 trillion.
The injection of this new capital will come as a welcome relief to the bank, which has seen its revenues and balances falling in recent years. Despite continuing to attract investment from donor countries, it is not this capital which makes up the majority of the bank’s revenue. The University of Iowa’s Centre for International Finance and Development identifies loan repayments as the primary source of operational-cost income. This is not surprising if the IMF’s fundamental nature is understood. The title ‘Fund’ is semantically deceptive, suggesting an operational capacity similar to the funds operated by charities. The IMF is however essentially a bank. It gains investment from donor countries and then derives its revenue, just as a high street institution does, through the repayment of loans to other countries at interest. In 1986 alone the repayment of interest totalled 2.7 billion (SDR) leaving a net profit for the bank of 1.3 billion (SDR).
The falling revenues for the bank are attributed by the University of Iowa’s study to the recent pattern of many countries in paying off their loan commitments. In December 2005 Brazil made the largest repayment in history to the institution when it completely paid off its $15.5 billion loan. This move represents a trend of many other less developed countries which have either fully or substantially fulfilled their debt obligations. The depletion of the IMF’s balance sheet has been substantial. In 2003 their total lending stood at 73 billion (SDR) whereas four years later this has been reduced to only 10 billion (SDR). With the fall in lending the fund has been deprived of significant interest repayments, and as such its profits have fallen.
Since the interest payments paid to the IMF are themselves partly returned to donor countries to pay the interest on their investments, the fall in lending has undoubtedly had a significant effect on the banking institutions within these Western countries. It is not therefore surprising that in this present climate of fiscal scarcity in the West some of the strongest pressure to increase IMF lending has come from the banking world. The Institute of International Finance (IIF), which represents some of the world’s largest banks, has lobbied the IMF and others to secure the new funding promised by the G20. It is not apparently enough to wait for the governments of the individual countries to authorise the funding since the current need is so urgent. Instead the IIF is pressing for $500 billion of the funding promised to be extended to the IMF within 90 days of the end of the G20 Summit. In a statement released by the organisation they announced that:
“The Fund will need a new and more forceful approach to strengthen international coordination of macroeconomic policies to reduce global imbalances, fostering an open, fully global economic system.”
With such significant pressure coming from banks, and the profits available to them if legislatures approve the funding, one might ask what benefit is extended to the less developed countries. Whilst it is true that a bank assists individuals in purchasing goods or services that they would otherwise be unable to obtain there are some significant differences between individuals’ and states’ debts. When an individual dies his debt is not usually passed on to his offspring, whereas this is certainly the case with a nation’s regime change. The sheer scale of the credit extended also proportionally dwarfs that made to individuals. Finally an individual is not obligated to change his living style or to purchase products only from companies tied or linked to the bank. Conditionalities remain however an essential determinate of whether a country receives ‘aid’, then tying it in future to the purchase goods from donor countries and to the opening up of its economy to the donor’s companies. All these differences make it unsurprising that the benefits sometimes enjoyed by individuals taking loans are not felt by the less developed countries that accept them.
A recent BBC report from Eastern Europe published the findings of a study by Cambridge and Yale universities. The study claimed to have discovered a link between the rise in tuberculosis cases and the acceptance of IMF loans. It was argued that the pressure applied by the IMF to remove funding from public services and to open them up to private competition has resulted in a drastic reduction in the level and efficiency of care. The start of the TB increases appears to link directly with the start of IMF assistance and continues thereafter. Rates of TB have risen in these countries by an average of 16.6%, whereas they may have otherwise continued to fall by 10%. With the results of this investigation and many others throughout the world on different issues of social welfare, it is not therefore surprising that in recent years so many countries have chosen to sacrifice other necessary expenditures to pay off their debts.
This situation has been criticised by charities and other NGO’s for many years, maintaining that the work of the IMF is often counterproductive and benefits often only the investing countries and banks. There has been significant pressure in recent years from the campaign group Make Poverty History and Christian Aid to stop the UK from lending any capital tied to controversial obligations and it prevent lending until the IMF changes its policies towards debtor countries. In the climate which has developed over the last two years however, the pressure to decrease and control the IMF’s role in the world may be silenced. With an economic recession that is increasingly growing to include the entire global community, countries may have little choice but to again turn to the IMF and their foreign donors for assistance, whatever the cost may be.