This week marks a change of focus for the IMF — and a new set of challenges.
On Monday, Greece finally exited its IMF-led bailout program, albeit with an enormous amount of debt still weighing on its economic future. The wrangles over Greece have not just further damaged the IMF’s image; they helped spark a major re-evaluation within the organization of the conditions attached to its lending.
For years, developing countries have argued that the IMF — dominated by wealthy nations — is biased, reserving its harshest medicine for non-white, non-Western countries. Now, another debate is growing at the IMF, one that might well be framed in similar terms. However, in this case the organization and its Western backers should stand firm.
In one of his first speeches, new Pakistani Prime Minister Imran Khan on Monday went on TV to ask Pakistanis living abroad to send money home. Everyone knows why: The country is facing a ballooning current-account deficit.
The State Bank of Pakistan’s US dollar reserves can cover imports only for a month and a bit. A country in this situation would normally turn to the IMF for help. Khan clearly wants to avoid that — and, again, everyone knows why: China would not like it.
What happens when countries such as Pakistan with cash flow problems go to the IMF? The organization, like any other lender, expects to see your books. Its officials then scrutinize your spending and tell you where to cut down. Often, this results in public spending collapsing and living standards suffering. This is generally why nobody likes the IMF.
Pakistan’s case is different — the problem is that the government does not want to open up its books to the IMF in the first place. That is because if it does, the world would see the full extent of its problems — in particular, the usurious terms attached to Chinese infrastructure investment.
For example, the Wall Street Journal has reported that some Chinese-funded thermal power plants are supposed to pay 34 percent per year. For 30 years. In dollars. Guaranteed.
That is the kind of deal the IMF would typically expect you to renegotiate or abandon. Indeed, if such details are confirmed, the political backlash against Chinese investment in Pakistan would be severe.
Meanwhile, a possible bailout is shaping up into something of a battle between the US and China. US Secretary of State Mike Pompeo last month said that there was “no rationale” for IMF money — by extension, US tax dollars, since the US is the biggest contributor to the IMF — “to go to bail out Chinese bondholders or China itself.”
At the same time, China is notoriously secretive about the terms of its lending. It would be quite unhappy about the transparency required for any bailout.
For the IMF, this is going to be the first test of a new age. The era of financial crisis has past; the era of political crisis has begun. It is no coincidence that the two countries closest to the brink financially right now are both struggling to avoid an IMF bailout, and both for geopolitical reasons.
Turkish President Recep Tayyip Erdogan made a point of minimizing the IMF’s role in the country’s mid-2000s economic revival and is trying everything to avoid allowing the organization back in now. This is hardly surprising: He is also in the middle of a confrontation with Washington. In those circumstances, how can he be seen to trust an organization in which the US continues to exert disproportionate power?
For his part, Khan seems more comfortable asking overseas Pakistanis, China or even Saudi Arabia for help rather than sharing Pakistan’s accounts with a Western-dominated multilateral organization.
In either case, it is far from certain that the US administration would allow the IMF to go about business as usual without making demands influenced by its own geopolitical agenda.
Nobody likes the IMF and it is easy to find good arguments for why it should become less dominated by the US and Europe. However, that is no longer what even non-Western countries should be most worried about. People have spent so long complaining about the costs of IMF bailouts that they have forgotten how dangerous a world without the institution would be.
Turkey’s government needs a check on its economic missteps, Pakistan needs someone to break its debilitating dependence on China and the world needs a financial stabilizer that is independent of the disruptions rippling out from the White House.
As Greece’s epic tragedy showed, the IMF is far from perfect. However, the organization needs to hold firm to its principles — transparency and fidelity to basic, rational, neoclassical economics — if the world is to handle the turbulence to come.
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