Under fire from both rich and poor countries for its strict policies, the International Monetary Fund (IMF) launched a new programme, called a Policy Support Instrument (PSI) in 2005, as a “non-financial mechanism.” Unlike other IMF programmes, it does not give direct financing. Instead countries get IMF advice, monitoring and, if all goes well, its seal of approval.
By Gumisai Mutume
Six countries, all of them African, have signed on so far. But some, including Mozambique, are already finding that PSIs, like their predecessors, are making it difficult to finance improved education and other internationally agreed Millennium Development Goals (MDGs).
“It is basically a standard IMF programme without the loans, but with the usual ‘structural adjustment’ provisions,” argues Soren Ambrose of the Kenya-based non-governmental organization (NGO) Solidarity Africa Network. If a PSI country fails to attain IMF certification, he adds, the consequences can be serious. “When the IMF cuts a country off, other lending agencies generally do the same. It is this ‘gatekeeper’ function, rather than the IMF’s loans, that give it its greatest power.” Cape Verde, Nigeria, Tanzania, Senegal and Uganda in addition to Mozambique have signed on to PSIs.
Access to cheap loans
Most countries in sub-Saharan Africa began implementing IMF- and World Bank-led structural adjustment programmes during the lean years of the 1980s. The programmes expanded the role of the market and reduced the role of the state in economic affairs. They required governments to cut public spending for education and health care, sell state-owned enterprises to private buyers and open markets to foreign goods. “African governments had to give up control over their economic decisions in order to qualify for World Bank and IMF loans,” notes Africa Action, a US-based NGO.
One of the main reasons for countries to sign on to a PSI after “graduating” from an earlier IMF programmes is that the Fund’s endorsement makes it easier and cheaper to borrow on international money markets. Ghana decided not to renew its existing IMF agreement and is currently negotiating a PSI. It has run out of other options for World Bank and IMF grants and low-interest loans but now needs to borrow some $750 mn from private lenders for infrastructure projects. The IMF believes this investment will help raise Ghana’s economic growth to 8.5 % a year and put it on track to middle-income status.
Ghanaian officials considered a PSI after finding the conditions of the earlier IMF loan to be “onerous and excessive”. Conditions are one of the most controversial aspects of IMF and World Bank lending. Critics often claim that the institutions do not pay adequate attention to how the conditions affect people’s lives or the contradictory ways in which multiple conditions interact with each other. Many governments also say that the conditions prevent them from making decisions which should rightly be made by elected leaders and that they also fail to address the basic problems that hinder economic development.
Conditions, but no cash
On average, poor countries have to meet 67 conditions on every World Bank loan, according to Eurodad, a network of European NGOs. Some loans come with as many as 200 conditions, as was the case with a grant made by the World Bank to Uganda in 2005.
Since the 1990’s, the IMF has begun to set more conditions, some of them outside the Fund’s traditional areas of monetary and fiscal policy, affecting trade, pricing, marketing, public sector management, agriculture and energy, and governance — an area it had not claimed expertise. After Tanzania signed a PSI, the East African newspaper noted that “even without receiving IMF funds, the country will still be subject to IMF conditions.”
The PSI is “very much tailored to what the countries wanted,” says Patricia Alonso-Gamo of the IMF’s Policy Development and Review Department. “They said ‘we want something that is endorsed by the Fund’s Executive Board, and we can tell the world we have strong policies.’ So it was very much demand-driven.”
The Ghanaian government hopes it will have to meet fewer conditions on its new PSI but the situation is unclear. Finance Minister Kwadwo Baah-Wiredu says his “government sees this as a major turning point in the economic history of Ghana and will be approaching it with all the necessary precautions.”
Falling short
Action Aid International, a South African–based anti-poverty group, compared the old and new IMF programmes in Uganda, Cape Verde, Tanzania and Mozambique and found little difference between the two. In Uganda, both set similar targets for inflation and anti-poverty spending. In Cape Verde, the PSI requires the government to limit inflation, refrain from new short-term borrowing and sets detailed benchmarks for financial sector reform. Where comparisons are possible, the group found that PSIs appear to carry over the old standards but with more ambitious targets. It concluded that the IMF continues to play a major role in managing the economies of poor countries, something it does not attempt to do in wealthier nations.
Double edged sword
In its 2007 report, The IMF’s Policy Support Instrument: Expanded Fiscal Space or Continued Belt-Tightening? Action Aid found that Mozambique was finding it difficult to make progress reaching the MDG on universal primary education. With the new PSI, the NGO says, the government will not be able to hire more teachers to reduce the overcrowding in schools.
The PSI does allow priority sectors like education and health to receive a major share of the national budget, Action Aid reports, but not enough to “allow for the scaling-up required to meet the MDGs and the Education for All objectives.”
For Action Aid, the new PSIs suggest that the IMF is adjusting “its image as the tough lender and disciplinarian to a more collegial sort of adviser. But even as the IMF tries to adopt a gentler image, the policies contained in PSIs remain consistent with the standard IMF austerity programmes that have proved deeply controversial over the last 25 years.”
Mr. Gumisai Mutume is a writer for United Nations Africa Renewal magazine. Please e-mail your comments to africarenewal@un.org.
