WASHINGTON, Sept 26: Too many countries depend too heavily on International Monetary Fund loans, and prolonged use of such cash can actually harm a country’s economy and often ends in failure, a new report revealed on Wednesday.
The highly critical study was released by the IMF’s new Independent Evaluation Office, which was set up last year under a mandate from the IMF’s board.
The study, the first such look at the inside workings of the IMF, followed months of research during which the evaluation office was granted unfettered access to internal IMF documents.
It found that countries like the Philippines, Pakistan and many others have been excessive users of IMF cash, and such loans are more likely to fail than succeed, can crimp economic growth, sometimes stunt the development of the country’s own policy expertise and can intrude on the democratic process.
The failure of so many loans was blamed on myriad reasons, ranging from a lack of political resolve in the countries themselves, overly optimistic assumptions of economic growth to the fact that the IMF sometimes gives loans for political reasons even though expectations of failure are quite high.
Of the 128 countries that had IMF programmes between 1971 and 2000, 51 were prolonged users of IMF loans—meaning they had an IMF programme for more than 7 years in any 10-year period. The report also said the prolonged use of funds was rising.
But perhaps most damning, the study revealed that among those prolonged users, almost 70 per cent of the countries had a failure rate of more than half of their IMF programmes. In other words, a large proportion of IMF loans to repeat borrowers ended in failure.
Egypt, Peru, Guyana and Mongolia repeatedly won IMF loans despite the fact that all of their programmes fell short of their goals. Many others, like Pakistan, won a near constant stream of loans despite almost always falling short of IMF demands.
A range of factors led to the prolonged use of IMF cash, the report found. Among them were problems in countries being worse than originally thought and that the IMF has become more involved with poor countries with bigger problems.
But other reasons for lengthy use of IMF cash were less benign—particularly the need to get the IMF’s “seal of approval” to enable other forms of funding.
“The need for a programme generates pressures, on both member countries and the IMF, to agree to programmes even when the probability of success is low, this increasing the likelihood of failed programmes and repeat access,” the report found.
The report also found IMF programmes sometimes deficient in design and reliant on excessively optimistic economic forecasts. Also at fault was a lack of IMF examinations of their own failures and not enough consideration being given to the political viability of any given loan programme.
“Some of the case studies, most notably Pakistan, and a survey of IMF mission chiefs suggest that political considerations have been an important factor in programme-related decisions on some occasions,” the report found.
The IMF has been trying to reform after it came under intense fire for its handling of the Asian financial crisis of 1997-99. The genesis of the evaluation office began with that debate. Wednesday’s report was the first, with others already planned.—Reuters
