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G20: IMF Finds a New Unpopularity
By Pavol Stracansky
BRATISLAVA, Sep 25 (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."
(END/2009)
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