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G20: IMF Finds a New Unpopularity

Pavol Stracansky

BRATISLAVA, Sep 25 2009 (IPS) - When some Eastern European states faced economic collapse as the financial crisis took hold, the International Monetary Fund (IMF) stepped in and offered governments huge loans.

But, as the G20 summit in Pittsburgh considers reform of the IMF, some economists and sociologists are now asking whether the social and economic cost of adhering to the strict credit conditions that came with them may not be too high for some.

Mark Weisbrot, co-director of the Washington-based think tank, the Centre for Economic and Policy Research told IPS: "The IMF loans have made the economic and social situations in these countries worse.

"The IMF will say that if a country is living beyond its means then it has to adjust, but what they do is make the adjustment even harder with really austere (loan) conditions."

The IMF has lent billions of euros to countries across Central and Eastern Europe hardest hit by the economic crisis.

The fund says its loans are designed to cushion the effects of reforms that countries have to undertake to recover from serious economic trouble. The specific loans to Eastern Europe were trumpeted as helping allow the countries involved to return to stability and solid economic growth.

In Ukraine, which has borrowed 16.4 billion dollars of IMF money, the IMF expects the economy to shrink by 14 percent this year. The currency, the hryvna, has lost more than 40 percent of its value since last October, and subsequently the cost of most foods has doubled.

In Latvia, which has taken a 7.5 billion euro loan from the IMF and the European Union, the economy is expected to shrink 18 percent, and the jobless figure is 16 percent.

In Hungary, which took a 25.1 billion dollar loan from the IMF last October, the economy is expected to shrink 6.7 percent this year, and another 0.9 percent next year.

But the IMF loans to countries in central and eastern Europe have included conditions that governments must rein in public spending. The Hungarian government submitted a budget to parliament this month with substantial spending cuts, while in Latvia there has been an agreement to cut pensions by 10 percent.

And with no room for fiscal manoeuvre to boost the local economy, unemployment has also been rising in the private sector.

"It's a downward spiral in which spending is cut and people are laid off, they have no money to spend, are being taxed more heavily, banks are not lending to businesses, and revenues keep falling because nobody is spending, producing or exporting anything," Nils Muiznieks, head of the Advanced Social and Political Research Institute in Riga, Latvia, told IPS. "It's not a pleasant situation."

Experts say this vicious circle has made the IMF a very unpopular organisation in the eyes of many locals, and there have been demonstrations over the loan conditions.

In Romania, which took a 20 billion euro loan from the IMF in May, the opposition demanded a vote of no-confidence in the government over IMF- imposed wage reforms. Angry workers have protested over public sector wage freezes and job cuts.

Peter Kreko, analyst at the Budapest-based think tank Political Capital, told IPS: "People in Hungary are aware of the IMF loans and the conditions with them, and the IMF is not very well liked. It is seen as an organisation that imposes conditions no one wants."

Some experts argue that the IMF's strict fiscal loan conditions hinder poorer eastern European countries. They say that with their hands tied on public spending because of IMF demands, they do not have the opportunity to stimulate their economies as richer western states do.

"The rest of the world is implementing stimulus packages ranging from anywhere between one percent and ten percent of GDP but at the same time, Latvia has been asked to make deep cuts in spending – a total of about 38 percent this year in the public sector – and raise taxes to meet budget shortfalls," Muiznieks told IPS.

They also claim that the IMF is lending money to struggling countries solely to protect western banks which have recklessly invested too much in what has been revealed to be a risky region, and that local people are paying the cost with a rapidly shrinking economy which creates rising unemployment and higher taxes.

"The IMF is giving money to countries like Latvia or Ukraine, for instance, to stop their currencies failing because if they do then they would not be able to pay back loans, and that would cause western banks, which are heavily exposed in the region, problems," Weisbrot told IPS.

"But from a human point of view it is far better off to let currencies fail and countries to default on debts rather than let an economy completely shrink. But that would be bad for bankers. They want to collect on their debt so they don't want the currency to be devalued, even if it means putting an economy into a deep recession."

The IMF has faced criticism in the past over conditions attached to its loans.

Critics point to the lack of economic or social progress made in developing countries which have taken IMF loans in the past and which are still paying them off. Others have highlighted the public backlash over its harsh conditions for bailout loans to Asian countries during the region's 1997 economic crisis.

They also argue that the loans land taxpayers with the bill for debts incurred by banks in the private sectors.

But some analysts believe that the criticism is unfair and that short-term disadvantages of the IMF's loans are sacrifices that society should be prepared to make for long-term benefits.

Kreko told IPS: "The IMF's loan philosophy is that it lends money but wants to see strict fiscal conditions adhered to. In some countries there is a real fear among investors that they could raise their fiscal deficits and Hungary, for instance, is now seen as much more economically viable (for investors) than it was a few years ago, and that is partly down to the IMF loans.

"There is of course the down side that countries which have these IMF loan conditions have to keep to them, and this makes the recession worse and in the short term it is extremely hard for people. But in the long term it is much better for them and prevents an even bigger economic catastrophe of the currency and the economy in general collapsing."

Kreko added: "The IMF is much softer with its loan conditions than it was a few years ago, and claims that the IMF was just a tool of western bankers aren't correct. Yes, it does want to save financial institutions, but saving them is also important for society as a whole. The interests of bankers and the interests of average citizens are not always very far apart."