As the International Monetary Fund (IMF) holds its annual meeting in Washington this week, mutinies are breaking out in countries that borrow from it.
From Ecuador and Argentina to Egypt, the upheaval has a familiar look, even after the IMF spent years trying to reinvent itself -- posing a challenge for new chief Kristalina Georgieva.
Since the global financial crisis the IMF, long resented for supporting austerity, has devoted more attention to how the benefits of growth are shared.
Its research has sometimes challenged the free-market consensus that the IMF itself has been a pillar of –- highlighting the dangers of inequality and the potential benefits of capital controls. “Neoliberalism: Oversold?” was the headline of one 2016 report.
But while the general guidance has changed, prescriptions for individual borrowers are still running into trouble.
A primary-vote drubbing for Argentina’s President Mauricio Macri derailed the biggest-ever IMF loan program. Violence in Ecuador forced officials to flee the capital and back away from IMF-endorsed policies. Rare protests in Egypt, which usually keeps a tight lid on dissent, have fueled speculation its government may do the same. Tunisia has also seen anti-austerity demonstrations.
To some extent, the problem is baked in. Countries only turn to the Fund for cash if their economies are already in trouble -- so the conditions for unrest are already there before the first IMF delegation touches down.
Still, the backlash is unsettling for an institution working to change its image.
Adnan Mazarei, a former IMF deputy director who helped oversee the response to the 2011 Arab Spring, said the Fund has worked to improve its understanding of the “social impact of what may be unavoidable reforms.”
“Has it learned adequately? No,” said Mazarei, now at the Peterson Institute for International Economics. But he said there’s often little choice. “We get called in when someone needs to be brought to the emergency room. And you can’t say, at that moment, ‘I’ll do surgery if you fill a list of 12 things you’ll never do that brought you here’.”
Georgieva told finance ministers and central bankers this week that the IMF has “significantly stepped up its engagement on social spending issues.” Fund officials say they often just set outlines, and leave it up to borrowers to decide where to trim budgets.
IMF First Deputy Managing Director David Lipton said Friday that reforms taken by countries as part of the fund’s programs should always be designed to take care of the less fortunate.
One problem is that success is measured by indicators like growth, inflation or fiscal balances “to the exclusion of almost everything else,” according to Ziad Daoud, chief Middle East economist at Bloomberg Economics.
As a result, “the programs rarely get a buy-in from the general public,” he said. “The risk of popular backlash is material.”
Egypt: hailed as an IMF success
Egypt, hailed as an IMF success, is a case in point. The Fund’s US$12 billion loan helped avert a crippling dollar shortage and lured billions into local-currency bonds. The budget deficit narrowed, and the economy is now growing faster than most Middle East peers.
But the cost has been steep and the benefits unevenly shared. Egypt had to devalue the pound and slash subsidies, increasing poverty. Businessmen complain privately that army-backed companies are quashing competition, defying the IMF’s support for a private sector-led recovery. Long-term foreign investment outside the oil and gas industry has yet to recover.
The IMF has encouraged countries to quit subsidizing fuel, often making the case on distributional grounds. Wealthier people are more likely to own cars, so it’s better to target spending on those in most need.
“The removal of energy subsidies ticks the boxes on fiscal sustainability and more equitable social support,” said Simon Kitchen, head of strategy at EFG-Hermes, an investment bank focusing on emerging and frontier markets. “But this takes a while to work. And in the meantime, the impact can be quite severe.”
In Ecuador, cuts of this kind underlay an explosive confrontation between protesters and authorities. Argentina also lowered subsidies. But after his shock defeat in August’s primary elections, which triggered a market collapse, Macri restored some of them.
The Fund still has plenty of supporters. Egyptian officials say they’re keen on maintaining close ties. Gulf Arab monarchies struggling to cope with lower oil prices have followed IMF advice by introducing value-added taxes.
Future of the IMF
IMF research has tilted toward recommending looser fiscal policies for countries that can afford it. Saudi Arabia even credits the Fund for delaying a plan to balance the budget that would have squeezed growth.
The Fund’s research often reflects what’s already happening in the world, but it’s hard to see measures like capital controls featuring in policy recommendations, said Kitchen at EFG. “The question is whether the IMF becomes a thought leader or just adapts to new trends in the global economy.”
And the recent revolts against partner governments in South America are a blow in a region where the IMF has been “trying to re-engage,” according to Monica de Bolle, director of Latin American studies at the School of Advanced International Studies at Johns Hopkins University.
“When you talk to people in Argentina or Ecuador, yes, they blame their country officials for the situation they’re in,” she said. “But they also blame the IMF.”