If we must go to the IMF...

[evanovitch]

If we must go to the IMF...



Thursday, June 11, 2009

Prime Minister Bruce Golding has given his strongest indication yet that <span style="font-weight: bold">we are likely </span>to seek a loan agreement with the International Monetary Fund (IMF), given the weak inflows in foreign exchange. We saw this coming from a mile off.

For reasons having their origin in the 1970s debacle with the Washington-based Fund, under the then Michael Manley administration, agreements with the IMF have been shrouded in partisan politics.

In the waning years of his Democratic Socialist People's National Party (PNP) government, Mr Manley was convinced that the IMF was being used as a tool by the United States administration to rein in his government, in favour of the pro-US Jamaica Labour Party (JLP) and its leader, Mr Edward Seaga. The IMF offered an Extended Fund facility with conditionalities that would cause the economy to scream and led to the laying off of thousands of Jamaicans. When Mr Manley rejected the structural adjustment components of the proposed pact, on grounds that it had a sting in the tail and would sap the energy out of the economy, it was to beckon the longest and bloodiest election campaign in Jamaica, culminating with defeat by the JLP in October 1980.
Jamaicans with good memory will recall the innovative, if misconceived slogan &quot;IMF Is Manley's Fault&quot; used devastatingly by the JLP.

Mr Seaga promptly re-established a borrowing relationship with the Fund but the conservative administration soon found that it too could not stomach the harsh medicine being prescribed by the Bretton Wood institution, and we can also recall Mr Seaga's &quot;Fresh Look&quot; initiative after falling out with the Fund.

One will also remember the unbridled glee with which Mr PJ Patterson announced in the mid-1990s that Jamaica was ending its borrowing relationship with the IMF. No more IMF tests. It was, clearly, a political triumph of the highest order.

We suspect, from the cautious tone of the prime minister in Parliament Tuesday, that he was very mindful of the political history of agreements with the IMF, and we would therefore suggest with all our strength that it is time now that we approach our relationship with the IMF in a more mature and non-political way, and instead see it in terms of whether it is good for the nation or not.

Mr Golding had stressed that any decision to restart borrowing from the IMF would be based on the economic fundamentals of the Jamaican economy, the amount of resources and the conditionality attached to the use of the IMF's resources.

This should also be the basis on which any debate about the Fund is conducted. We as a nation, of course, will need to unlearn some of the misgivings we have harboured about the IMF over the years. It is fortunate that the Fund has been strenuously trying to shed its past image as &quot;International Monetary Foe&quot; to become the &quot;International Monetary Friend&quot;.

As we have pointed out recently, and it is worth repeating here, &quot;the IMF needs a substantial increase in resources to meet the needs of borrowing countries caught in an unprecedented global financial crisis of unknown duration&quot;. We have also called for the mobilisation of additional resources, including larger contributions from the US, Europe, China and Japan, selling of some of its gold stock, and an additional issue of Special Drawing Rights solely for developing countries and transition economies.

And watch that conditionality clause.

[johnnycakes]

Re: If we must go to the IMF...

By all means, go right to the international loan sharks, the tools of the capitalists, the imperialists, the neocolonialists who have only further impoverished the already poor nations of the world.

The governments borrow and waste the money and the people especially the poor whose benefits are cut to shreds by the IMF imposed conditions for the loans get to pay the bill for years and years while their hospitals, roads, human condition go down the drain.

The stupid donkeys will do it again as sure as the sun rises in the east.

&quot;Insanity is trying the same thing over and over and expecting different results&quot;

[evanovitch]

IMF: then and now

IMF: then and now


By Gary Peart

Sunday, June 14, 2009

I have learned several things from my research for these articles. As a product of the seventies in Jamaica, for example, and I am sure the same is true for most if not all of my other Jamaican Generation X colleagues, I never gave much thought to the existence of the IMF before the seventies. Yet, it is fair to say that the IMF had a reasonably successful phase one.

Perhaps the unity of purpose that victory often brings as well as the relative homogeneity of the victors in World War II had something to do with that. But when you look at it, the International Monetary Fund did what it was setup to do in the first phase of its existence, 1944, or say 1947, when the fund started making its first loans, to 1971.

Principal among these achievements, as I mentioned in my earlier article (Sunday Finance 07.06.09), was the establishment and maintenance of a stable exchange rate, backed by a gold standard for convertibility. In addition, the fund achieved an unprecedented expansion of international trade. Not that the early years were without controversies and contentiousness. These raged primarily between Britain and the United States.

Both Britain and the United States had concerns that the IMF could become an unwieldy monster that could eventually threaten their own sovereign economic policies if they did not control it from the beginning.

In addition, there were discussions and interim disagreements on: how much money each member should put in; how much each could draw out; how many permanent representatives each member would have; where the UN and the IMF should be located, with Britain lobbying hard for London; and whether the US Dollar should serve as an alternative standard of exchange along with gold.

Disagreements to all these start-up matters succumbed to a consensual approach. As John Maynard Keynes put it in his opening address on the IMF's becoming operational in December 1945, &quot;The IMF fought to find a common standard, a common measure, a common approach and a common rule applicable to each member and not irksome to any.&quot;

The IMF started operations with pledges from 39 member-nations totalling US$7.4 billion.

The fund then focused on granting post-war reconstruction loans and facilities to its war-torn European members. The first loan went to France on May 9 1947 for US$250-million. Similar loans to Britain and other European countries in varying amounts followed for the next two-year period, with the first loan to a non-European country going to India in October 1948 for an agricultural development project.

However, during the period 1947-1967, the IMF lent relatively little of its resources. Over half the borrowers at that time were developed nations and they used their loans as short-term, bridging loans, which is what the IMF was setup to do. This was so, in spite of the fact that the majority of the fund's members were, at the time and as they are now poor, developing nations that require access to long-term development capital.

A new set of complaints emerged in the 1950s in which poorer nations, among whom at the time was France, began to quarrel that the Fund's monetary system favoured the developed countries, particularly the United States, since the US dollar was the anchor currency. By the 1960s, the amount of US Dollars circulating in the Fund far exceeded the amount of gold into which they were supposedly convertible and on August 15, 1971, US President Richard Nixon unilaterally declared that the US dollar would no longer be convertible into gold. This, in effect, put an end to the fixed exchange rate regime on which the Bretton Woods Agreement was based and ushered in the era of the floating exchange rate. This gave birth, at the same time, to what one international financial observer called, &quot;a new world of foreign exchange traders, arbitrageurs, financial gurus and casino capitalists.&quot;

The cessation of the gold standard gave the IMF an identity crisis, which sent the organisation scurrying back to the drawing board. They quickly found comfort in the fact that they had already been set-up to perform three broad functions:

.Surveillance
.Financial Assistance; and
.Technical Assistance

No longer required to administer the narrow task of its members' compliance with a fixed exchange rate regime, the IMF would now focus on the larger tasks contained in its third broad function: technical assistance.

The IMF would now teach and enforce the rules of how to play in the global arena. Their chosen methodology was through a system of rigid regulations referred to collectively as &quot;conditionality.&quot;

Conditionality refers to either a rigorous set of pre-qualification criteria for an IMF loan or an equally rigorous set of targets to be monitored after a loan has been disbursed, or some combination of both.

Conditionality does not exist in the IMF's Articles of Agreement. The requirement was introduced in 1974 at the insistence of the United States over the objections of the rest of the fund's membership, following the breakdown of the gold-backed, par value system in 1971. The rationale was that the developing member-nations that were now calling on the fund, all had long-term, structural adjustment and foreign exchange needs that required extended facilities. Enter Jamaica.

Jamaica officially joined the IMF on February 21, 1963. It is important to remind the reader that the International Monetary Fund is a voluntary membership organisation to which members must pay their dues, or quota, as it is called, in order to remain a member. Members pay their quota and members may borrow relatively inexpensive money. You may say that the IMF functions somewhat like an international credit union for its members.

As at May 31, 2009, Jamaica was a fully paid-up member of the IMF. So, throughout the entire name-calling, the cussing and the passion-filled dramas of breaking off and going back to the IMF during the 1970s and '80s, Jamaica paid its quota.

By the mid-1970s, the Cold War and its effects were at their height in our part of the world. Michael Manley, the prime minister of Jamaica, had made no secret of his party's political leanings towards the socialist ideology and Eastern bloc countries. This was formalised by his declaration of democratic socialism in 1974 and strengthened by his visit to Fidel Castro in Cuba in 1975. So polarising was the political environment in Jamaica at the time that some family members on different sides of the spectrum stopped visiting or speaking with each other and rumours of US-led, destabilising conspiracies were everywhere. It was during these times that the IMF, in the perception of many, became linked with other three-letter US agencies considered to have subversive or sinister motives.

There was much talk and regular IMF visits to Jamaica in this heated environment. Finally, in October 1976, Jamaica received the go-ahead for assistance from the IMF, two months before general elections were held here on December 15 1976. A two-year Stand-By Agreement for US$75 million had been finalised, which was not disbursed until May 1977. By December 1977, the Agreement was suspended because Jamaica failed to meet one of its quarterly targets.

A stand-by Agreement is one that allows a member to borrow for a period up to two years, with payback up to five years after disbursement. Interest was typically 0.5 per cent.

The following year, in January 1978, the IMF was invited back to Jamaica to negotiate a three-year Extended Fund Facility (EFF) for US$240m. This is an arrangement for up to three years, with payback within seven years after disbursement. In order to qualify for this facility, however, Jamaica had to devalue its then two-tiered currency by 13.6 per cent (basic rate) and by 5.2 per cent (special rate) and the country was placed on a crawling peg system of regular devaluations over the next year.

In addition, Jamaica had to levy new taxes on consumer goods; reduce government spending; increase charges for government services; lift price controls; place a ceiling on wage increases; and to slow down state-owned enterprises.

As predictably unachievable as these targets were, Jamaica had no choice but to comply. In June 1979, the EFF was increased to US$428 million, now to cover the costs of severe flooding that month as well as to offset an increase in the price of oil.

Conditionality took its toll and in March 1980, Prime Minister Michael Manley broke off relations with the IMF and announced a new non-IMF path akin to his earlier Emergency Production Plan.

General elections were held on October 30 1980. Edward Seaga and the Jamaica Labour Party were swept into power in what was then the largest majority ever - 51 seats to nine.

The new administration plunged itself immediately into addressing the country's structural adjustment requirements: Seven priority areas were identified for production and foreign exchange earning: garments &amp; sewn products; footwear &amp; leather products; construction materials; food and agro-industry; automotive products; furniture; and electronics &amp; electrical products. Emphasis would be placed on light and value-added manufacturing.

In addition, two new agencies were created - The Jamaica National Investment Promotion (JNIP) to attract overseas investors and to oversee Jamaica's privatisation programme; and the Jamaica National Export Corporation (JNEC) to develop markets for the country's export products.

The oil shocks started hitting in earnest in 1982, culminating with the gas price demonstrations of 1984 that took about ten lives. The Seaga administration continued negotiating with the IMF for a facility with livable terms. Finally, in1987, under the weight of conditionality and growing social unrest, the administration terminated its talks with the IMF. And as is well known the last PNP administration did not renew the country's loan relationship with the IMF during its eighteen year term.

Would a new relationship with the IMF reopen old pitfalls? Is the IMF inescapably a bull in the fragile economies of its developing nation members? Do the borrowing members have any bargaining power? Has the IMF learned anything form the intense unpopularity and negative impact of harsh conditionality? These and other questions are on the minds of not only representatives of small debtor, developing nations.

In a fact sheet published by the IMF dated April 2009, the organisation says that it has, &quot;modernised its conditionality framework in the context of a comprehensive reform to strengthen its capacity to prevent and resolve crises. The new framework ensures that conditions linked to disbursements of IMF financing are sufficiently focused and adequately tailored to the varying strengths of members' policies and fundamentals.&quot;

Gary Peart is chief executive officer of Mayberry Investments Ltd. Contact: [email protected]