Tag: IMF

There’s need for a permanent solution to our debt crisis

There’s need for a permanent solution to our debt crisis Featured

The fifty-four sovereign African states are vastly different from each other, with distinct languages, histories, social and economic challenges, and possibilities. However, they are united by a political project that has been institutionalised through the African Union and its legal and organisational frameworks and by a neocolonial sovereign debt crisis.

Many countries across the Global South, particularly those in Africa, are currently in the throes of fiscal crises – largely the result of a perfect storm of global events. The COVID-19 pandemic triggered a global economic recession, which in turn impacted national economies. The ongoing conflict in Ukraine has disrupted vital global supply chains for food, fertilisers, and energy, thereby increasing many countries’ import bills and straining their budgets. The fiscal crisis is fundamentally a result of an unsustainable build-up of sovereign debt in the last decade, fuelled by cheap credit from Western economies and encouraged by international financial institutions, including the IMF. The COVID-19 pandemic and the conflict in Ukraine made what was already a tenuous situation worse.

Many poor countries are turning to the IMF as a credible source for finance in the present moment, largely egged on by claims that the IMF has reformed from its bad old ways and no longer demands crashing austerity as a conditionality. (‘Factsheet: IMF Conditionality’, International Monetary Fund, 22 February 2021, https://www.imf.org/en/About/Factsheets/Sheets/2016/08/02/21/28/IMF-Conditionality.)
Back in 2016, IMF economists published a mea culpa in which they (sort of) confessed the sins of the past and promised that they had turned over a new leaf. (Ostry, Loungani, and Furceri, ‘Neoliberalism: Oversold?’; Grieve Chelwa, ‘Is it Too Late Now to Say Sorry?’ Africa Is a Country, 29 May 2016, https://africasacountry.com/2016/05/is-it-too-late-to-say-sorry-imf-edition.). The evidence, however, suggests anything but a reformed IMF. A study from the International Labour Organisation that carefully tracked IMF conditionality in 2020, when many countries were grappling with health and financial burdens related to the COVID-19 pandemic, found that in most of the 148 countries examined, the IMF still required austerity as a condition for granting assistance. (Shahra Razavi et al., ‘Social Policy Advice to Countries from the International Monetary Fund during the COVID-19 Crisis: Continuity and Change’ (ILO Working Paper 42, International Labour Organisation, Geneva, 10 December 2021), https://www.ilo.org/global/publications/working-papers/WCMS_831490/lang–en/index.htm.).

The government of Zambia, the first country to default on its debt as a result of the pandemic, recently concluded a financing deal with the IMF with the signature condition of ‘a large, front-loaded, and sustained fiscal consolidation’, as the IMF put it –
in other words, austerity in black and white. (International Monetary Fund, ‘Zambia: Request for an Arrangement Under the Extended Credit Facility-Press Release; Staff Report; Staff Supplement; Staff Statement; and Statement by the Executive Director for Zambia’, IMF Country Report, no. 22/292 (September 2022), https://www.imf.org/en/Publications/CR/Issues/2022/09/06/Zambia-Request-for-an-Arrangement-Under-the-Extended-Credit-Facility-Press-Release-Staff-523196, 10.). The IMF wants the Zambian government to reduce its expenditure by billions of dollars over the next three years, which will be most acutely felt by the poor majority.(Grieve Chelwa, ‘IMF Deal: Cry, My Beloved Zambia’, Grieve Chelwa (blog), 7 September 2022). The government of
Sri Lanka, a country whose debt-fuelled boom came to a spectacular halt earlier this year, is also seeking IMF assistance, with early indications showing that the conditions attached to the deal will be as indefensible as the Zambian deal. (Peter Doyle, ‘The IMF’s Zambian and Sri Lankan Programs are Indefensible’, Peter Doyle (blog), 14 September 2022). The Ghanaian government too is desperately seeking another IMF deal, this after the last one was celebrated as the deal that would ‘restore the lustre to a rising star in Africa’. (‘Ghana to Conclude IMF Deal in March – Akufo-Addo Hopes’, Africanews, 7 February 2023, https://www.africanews.com/2023/02/07/ghana-to-conclude-imf-deal-in-march-akufo-addo-hopes/; ‘Ghana: IMF Program Helps Restore Luster to a Rising Star in Africa’, International Monetary Fund, May 2019, https://www.imf.org/en/Countries/GHA/ghana-lending-case-study.).

All this goes to show that the IMF cannot be the answer to the poorer nations’ economic challenges. Alongside its sister institutions, the IMF has provided ‘assistance’ to poor countries ever since its establishment in 1944, and yet many of these countries have remained poor in spite of this. The reason is that IMF assistance has never confronted the structural factors that have continued to consign many countries to the ranks of the poor. As diagnosed many years ago by scholars such as Walter Rodney and Andre Gunder Frank, development in the North is sustained by underdevelopment in the South. (Andre Gunder Frank, ‘The Development of Underdevelopment’, Monthly Review, 18 April 1966, https://monthlyreviewarchives.org/index.php/mr/article/view/MR-018-04-1966-08_3; Walter Rodney, How Europe Underdeveloped Africa (New York: Verso Books, 2018).). Seen this way, the IMF, as the archetypical Northern institution, is duty bound to maintain and entrench this status quo. How else does one explain the IMF’s solution to Zambia’s financial woes, for example? The IMF prescription ignores the fact that the country’s foreign-owned copper mines continue to generate billions for their overseas shareholders yet pay so little in taxes in a country where the estimated annual income taxes for one mining project alone could have amounted to nearly half the 2020 national water supply and sanitary budget.(Daniel Mulé and Mukupa Nsenduluka, ‘Potential Corporate Tax Avoidance in Zambia’s Mining Sector? Estimating Tax Revenue Gains from Addressing Profit Shifting or Revising Profit Allocation Rules. A Case Study of Glencore Mopani Copper Mines’, Oxfam Research Backgrounder Series, December 2021, https://www.oxfamamerica.org/explore/research-publications/potential-corporate-tax-avoidance-in-zambias-mining-sector/.).

A new kind of institutional apparatus that fosters cooperation, rather than competition, is required for Africa’s economic liberation and that of the Third World more generally. This would mean, for example, establishing currency arrangements that bypass the US dollar, which is a strong lever of IMF conditionality and a weapon of US foreign policy. These kinds of long overdue proposals are already underway in parts of the world, such as in Latin America, where Brazil’s President Luíz Inácio Lula da Silva (known as Lula) and Argentina’s President Alberto Fernández have proposed the establishment of a regional currency, the sur, that could be used to settle cross-border claims and store reserves.(Alberto Fernández and Luiz Inácio Lula da Silva, ‘Escriben Lula y Alberto Fernandez: Relanzamiento de la alianza estratégica entre Argentina y Brasil’ [Lula and Alberto Fernandez Write: Relaunching the Strategic Alliance Between Argentina and Brazil], Perfil, 21 January 2023, https://www.perfil.com/noticias/opinion/relanzamiento-de-la-alianza-estrategica-entre-argentina-y-brasil-por-alberto-fernandez-y-luiz-inacio-lula-da-silva.phtml.).

The hard work of figuring out the technical details related to the implementation of such regional currencies must begin in earnest.(Zinya Salfiti,
‘Nobel Economist Paul Krugman Slams Brazil and Argentina’s Joint Currency Plan, Saying “It’s a Terrible Idea”’,
Markets Insider, 30 January 2023,
https://markets.businessinsider.com/news/currencies/paul-krugman-brazil-argentina-south-american-euro-terrible-idea-2023-1.).
Africa, for example, needs a continental bank that is wholly owned by the people and will serve as a genuine tool to bolster sovereign industrial policies. The highly influential African Development Bank, with its significant Western shareholding, is not fit for purpose. (‘United States of America’, African Development Bank, accessed 13 February 2023, https://www.afdb.org/en/countries/non-regional-member-countries/united-states-of-america.).

Furthermore, there is an urgent need to restore and reinvigorate the capacity and autonomy of the African state to deliver on its development agenda. State capacity and state autonomy depend on the ability to adequately mobilise tax revenues, an area in which the African state has continued to underperform. The tax-to-GDP ratio, a measure of resource mobilisation, has remained incredibly low in Africa largely as a result of illicit financial flows that continue to spirit away billions of dollars from the continent every year.(African Tax Administration Forum (ATAF), African Union Commission (AUC), and Organisation for Economic Co-operation and Development (OECD), Revenue Statistics in Africa 2022 (Paris: OECD Publishing, Npvember 2022), https://www.oecd.org/tax/tax-policy/brochure-revenue-statistics-africa.pdf, 3; United Nations Conference on Trade and Development, Economic Development in Africa Report 2020. Tackling Illicit Financial Flows for Sustainable Development in Africa (Geneva: United Nations, 2022)).

As a consequence, the adequate delivery of the kind of social services that underpin people’s dignity (social security, health, education, etc.) continue to be hamstrung. (Isabel Ortiz et al., Fiscal Space for Social Protection. A Handbook for Assessing Financing Options (Geneva: International Labour Organisation, November 2019), https://www.ilo.org/secsoc/information-resources/publications-and-tools/books-and-reports/WCMS_727261/lang–en/index.htm.).

Further, the low tax-take in the poorer nations forces many governments to seek the easy way out by borrowing on the international capital markets, setting into motion dangerous debt dynamics that ultimately lead governments back into the unloving arms of the IMF. Notably, IMF conditionality rarely confronts the fact that state capacity and autonomy have been eroded in Africa largely as a result of the tax dodging practices of transnational corporations.

Just as problematic is the leading role that the IMF and its allied institutions have taken in the fight to save the planet from climate change. The IMF’s answer to climate change, which is influential given its inordinate role in the world, points to the private capitalist sector as the solution to the planet’s problems.( ‘COP27: IMF Calls for Climate-Smart Investment in Africa’, Africanews, 8 November 2022, https://www.africanews.com/2022/11/08/cop27-imf-calls-for-climate-smart-investment-in-africa/.).

All this is ironic given that the private capitalist sector’s insatiable appetite for profits at all costs has been responsible for the climate crisis.

The Third World must re-imagine a path out of our current crisis that doesn’t depend on the IMF, its allied institutions, and Western capital. The last seventy years or so have demonstrated that a reliance on these institutions only serves to trap the Third World in a perpetual state of underdevelopment. We need an emancipatory set of institutions and frameworks that will lead to the total independence of the Third World.

This is a task that our political leaders have to take on in a serious way with a very strong commitment to the economic, and thus total, emancipation of the African continent and the Third World more broadly.

We need to rebuild a present, and future, that centres the needs and aspirations of the majority.

Over the course of the past two decades, the stranglehold of Western-based bondholders and Western-controlled IFIs has weakened as other countries – mainly China – have emerged as the largest trading partners with African states and as the largest lenders to these states. Importantly, China’s public and private debt forgiveness during the pandemic has put pressure on IFIs to rethink the harshness of their debt repayment-austerity governance model.

The opening provided by Chinese funding is not an opportunity merely to borrow more: it is an opportunity for African states to construct genuine, and sovereign, development projects in this climate. These projects must seize multiple opportunities to raise funds, and the fragility of IMF power must also be utilised to advance fiscal and monetary policies that are built on an agenda committed to solving the problems of the African people, not facilitating the demands of wealthy bondholders and the Western states that back them. A number of mechanisms must be put on the table to avoid the IMF-driven debt-austerity trap.
There’s need to invalidate historical debts and rescue stolen assets:

Renegotiate all odious external debts of the poorer nations. An ‘odious debt’ is a debt incurred by a country without the assent of its people, such as during the phase of a military dictatorship.
Seize assets held in illicit tax havens, which as of 2010 total at least $32 trillion.(United Nations Conference on Trade and Development, Economic Development in Africa Report 2020. Tackling Illicit Financial Flows for Sustainable Development in Africa, 88.).

Build progressive tax codes:
Build the capacity of tax departments in each country, including digital tax infrastructure.
Implement taxes on wealth and inheritance.
Implement higher rates of taxation on income, such as capital gains, that is made through financial speculation by all non-bank corporate entities.
Discourage the base erosion and profit-shifting activities of multinational corporations and adopt a unitary approach to tax the share of global profits generated by subsidiaries of multinational corporations.
Reform domestic banking infrastructure:

Democratise the banking system by expanding the role and size of public banking and by implementing more regulations of and transparency for private banking.
Enforce ceilings as a percentage of liabilities on speculative banking activity by commercial banks.
Regulate the interest rates that banks charge for specific goods, such as housing loans.
Implement tight regulations for pension funds so that the savings of the people are not used recklessly for financial speculation and encourage the creation of public sector pension funds.
Build alternative funding sources to the IMF’s debt-austerity traps:

Set capital controls to prevent both foreign and domestic capital flight, policies that even the IMF argues are important.(International Monetary Fund, ‘Review of The Institutional View on The Liberalization and Management of Capital Flows’, IMF Policy Paper, 30 March 2022).
As highlighted earlier, capital flight is not only deleterious for local financial markets: it also robs the continent of the resources needed to drive an autonomous developmental agenda. With capital controls, governments will be able to devise effective monetary policies in an environment that would not be buffeted by shocks and unexpected fragilities. Capital controls must be implemented alongside a robust wealth tax collection system, pro-labour distribution policies, and the prevention of dollarisation.
Attract investment from institutions that do not enforce structural adjustment conditions, such as the Belt and Road Initiative and the BRICS’s New Development Bank. The absence of SAPs-like conditions on these emerging and alternative sources of capital explains their growing popularity in the South and Africa in particular.
Take advantage of local currency central bank swap arrangements (such as those offered by the People’s Bank of China).
Adopt ceilings on the interest rates that commercial and multilateral lenders charge developing countries.
Enhance regionalism:
Encourage the creation of regional trade and reconciliation mechanisms.

Fred M’membe
President of the Socialist Party

IMF and our debt crisis

IMF and our debt crisis Featured

In 1919, John Maynard Keynes of the United Kingdom’s Treasury Department published a book that became a sensation. In the book, entitled The Economic Consequences of the Peace, Keynes observed that the Great War had ‘so shaken the system as to endanger the life of Europe itself’. (John Maynard Keynes, The Economic Consequences of the Peace (London: Palgrave Macmillan, [1919] 2019), 58.). The Treaty of Versailles, which ended the war, did not grasp the underlying problems that had led to the war and only cemented the victory of some countries against others. The treaty left structural problems intact, such as the ‘disordered finances’, in Keynes’ words, of many countries (not only Germany, which faced an enormous and unpayable reparations bill). The Wall Street Crash of 1929, the Sterling Crisis of 1931, and the Banking Panics of 1931–1933 revealed the underlying vulnerabilities of capitalism, with the ‘disordered finances’ being the spur towards the potential general collapse of the system. In 1936, Keynes published The General Theory of Employment, Interest, and Money, a manual to save capitalism by a theoretical plea for governments to use state resources to recycle profits and balance an unbalanceable system. Keynes, who dabbled in eugenics theory, did not extend his views on state intervention to protect the system in the British colonies and prevent the decline of their population’s living standards.

When the United States invited its allies to Bretton Woods (New Hampshire) in July 1944 to discuss how to manage the structural crises that contributed to the Second World War, Keynes – who was one of the main figures at this meeting – said that it would be ‘the most monstrous monkey house assembled for many years’, suggesting that ‘twenty one countries [that] have been invited’ – presenting a list of primarily colonised countries, from Guatemala and Liberia to Iraq and the Philippines – ‘clearly have nothing to contribute and will merely encumber the ground’. (John Maynard Keynes, The Collected Writings of John Maynard Keynes: Volume XXVI, Activities
1941–1946. Shaping the Post-War World: Bretton Woods and Reparations, ed. D. E. Moggridge (Cambridge: Cambridge University Press, 2013), 42.)

Instead, Keynes preferred that the two founder states of the Bretton Woods Conference, the United Kingdom and the United States, ‘settle the charter and the main details of the new body without being subjected to the delays and confused counsels of an international conference’, as he explained a few years earlier. (International Monetary Fund, IMF History Volume 3 (1945–1965): Twenty Years of International Monetary Cooperation Volume III: Documents (Washington, DC: International Monetary Fund, [1969] 1996), 15.) In fact, Keynes (on behalf of the United Kingdom) and Harry Dexter White (on behalf of the United States) arrived at the meeting with two plans already drafted, which they put on the table and upon which the final Articles of Agreement for the International Monetary Fund as well as the International Bank for Reconstruction and Development (or the World Bank) were built. The other participants were largely onlookers.

Despite the limited input of most of the world, which was still under colonial rule, the purpose of the IMF as laid out in the Articles of Agreement was straightforward, none of it built to extend the power of the British imperial system. The main thrust of the articles was to assist the ‘expansion and balanced growth of international trade’ and to ‘contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy’. (International Monetary Fund, Articles of Agreement of the International Monetary Fund (Washington, DC: International Monetary Fund, 2020), https://www.imf.org/external/pubs/ft/aa/pdf/aa.pdf). To establish these ‘primary objectives’, the IMF was tasked with preventing any short-term problems from becoming long-term crises, such as by maintaining exchange rate stability and facilitating loans to prevent balance-of-payments spirals ‘without resorting to measures destructive to national or international prosperity’. When the former colonial countries won their freedom, most of them became members of the IMF based on the Articles of Agreement, and in 1961, the IMF created its Africa Department. Until the Third World Debt Crisis that began to spiral with Mexico’s default in 1982, the IMF had primarily operated by providing short-term financing in a relatively modest fashion through the Compensatory Financing Facility (1963) and the Buffer Stock Financing Facility (1969). (International Monetary Fund Policy Development and Review Department, ‘Review of the Compensatory and Contingency Financing Facility (CCFF) and Buffer Stock Financing Facility (BSFF) – Preliminary Considerations’, International Monetary Fund, 9 December 1999, https://www.imf.org/external/np/ccffbsff/review/index.htm.).

In the aftermath of Mexico’s default, the IMF conducted what its managing director, Michel Camdessus, called the ‘silent revolution’. (James M. Boughton, The IMF and the Silent Revolution Global Finance and Development in the 1980s (International Monetary Fund, 11 September 2000), https://www.imf.org/external/pubs/ft/silent/index.htm#3.).

Against its manifest purpose, the IMF began to respond to requests for short-term bridge financing by demanding that countries radically change their domestic economic policies as a condition for approval. Through their new programmes, the Structural Adjustment Facility (1986), and then the Enhanced Structural Adjustment Facility (1987), the IMF put a singular recipe on the table: privatise the economy, including the state sector; commodify areas of human life that had up to that point been in the public domain; terminate any government deficit financing; and dissolve any barriers on foreign capital investment and trade (such as subsidies and tariffs). The IMF had experimented with these measures in Bolivia, Chile, and Peru in the 1950s with limited success before turning them into the basis for their policy not towards all countries, but specifically to be used against states in Africa, Asia, and Latin America, which struggled with an international economic system shaped by colonialism and capitalism. These were the countries that had championed the formation of the UN Conference on Trade and Development (UNCTAD) in 1964 to advance their own proposals to exit the neocolonial world order, proposals that were passed by the UN General Assembly in 1974 as the New International Economic Order (NIEO). The new IMF policy emerged in contest against the possibility of an NIEO, since rather than allow for a better deal for raw material prices or for tariff-subsidy arrangements, it demanded the withdrawal of all these anti-colonial schemes. Even Raghuram Rajan, the IMF’s own chief economist from 2003 to 2007, wrote in his book Fault Lines (2010) that the IMF’s policies appeared as a ‘new form of financial colonialism’. (Raghuram Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy (New Jersey: Princeton University Press, 2010), 93.).

The IMF’s ‘silent revolution’ intensified the crisis faced by the poorer nations, driving them into a spiral of indebtedness and poverty. The general formula for this spiral is as follows:

Countries go into short-term balance-of-payments debt because of their lack of capital – much of it stolen during the colonial period – and their reliance upon borrowing to conduct (often expensive) capital improvements in their countries (some of which are in the raw material extraction sector, thereby operating as a subsidy for foreign mining companies).
The IMF arrives and informs the finance ministries that government spending for education, healthcare, and other social development projects must be cut in order to prioritise payments to wealthy bondholders (in the London Club) and to governments – mostly the old colonial states – (in the Paris Club) who have lent them money.
To pay the debt servicing on these loans, the poorer nations cut their government spending, thereby impoverishing their people further, and export more of their cheapened raw materials (rather than more profitable finished products). When countries start to export more and more primary commodities, this produces a price war that leads to a steep decline in the revenues gained from the volume of exports.
With weakened revenues from imports, the poorer nations must continue to cut their social spending, ramp up their sales of raw materials and public assets, and borrow more money from external private and governmental sources… just to pay off the interest on their ballooning debt.
The imperative of ‘exchange rate stability’ prevents governments in the poorer nations from exercising any effective monetary policy – including implementing capital controls – while their fiscal policy is already eviscerated by balanced budget demands from the IMF, social spending cuts, and pressure from wealthy bondholders to ‘reform’ (i.e., surrender) their tax policy.
In 2016, senior members of the IMF’s research department published an article called ‘Neoliberalism: Oversold?’, which argued that the ‘adverse feedback loop’ set in motion by austerity, followed by increased inequality and then yet more austerity, had to be broken by a less rigid, less fundamentalist approach to ‘liberalisation’ and neoliberalism. (Jonathan D. Ostry, Prakash Loungani, and Davide Furceri, ‘Neoliberalism: Oversold?’ Finance and Deveopment 53, no. 2 (June 2016), https://www.imf.org/external/pubs/ft/fandd/2016/06/ostry.htm.).

There was even a suggestion of ‘greater acceptance of [capital] controls to deal with the volatility of capital flows’. While there was a decline in the conditions that the IMF required to receive their loans over the course of the decade before this paper was published, there is no evidence of any qualitative change in IMF policy. (Alexander E. Kentikelenis, Thomas H. Stubbs, and Lawrence P. King, ‘IMF Conditionality and Development Policy Space, 1985–2014’, Review of International Political Economy 23, no. 4 (2016): 543-582.).

Guinea, for instance – a country that has at least a third of the world’s bauxite – entered the IMF rollercoaster in 2011 and immediately became trapped in the debt-austerity cycle.(Lounceny Nabé and Kerfalla Yansané, ‘Guinea: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding’, International Monetary Fund, 20 June 2011, https://www.imf.org/external/np/loi/2011/gin/063011.pdf.). In 2014, the Guinean government of Alpha Condé wrote to the IMF that the ‘tight fiscal and monetary policy’ had led to a ‘reduction in spending, including on domestic investment’, which made it impossible for Guinea ‘to respect the indicative targets for spending in priority sectors’. (Mohamed Diaré and Lounceny Nabé, ‘Guinea: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding’, International Monetary Fund, 1 February 2014, https://www.imf.org/External/NP/LOI/2014/GIN/020114.pdf). In other words, Guinea borrowed to try and exit a crisis, but the borrowing itself led to cuts in social spending and deepened its crisis. In 2019–2020, the country experienced a cycle of protests sparked both by Condé’s attempt to change the constitution as well as the worsened economic situation. A UNICEF report found that, in 2019, twenty-five very poor countries spent more on debt servicing than on education, health, and social protection combined. Sixteen of those countries are on the African continent.(UNICEF Office of Research – Innocenti, COVID-19 and the Looming Debt Crisis, Innocenti Policy Brief 2021-01, Protecting and Transforming Social Spending for Inclusive Recoveries (Florence: UNICEF, April 2021), https://www.unicef-irc.org/publications/pdf/Social-spending-series_COVID-19-and-the-looming-debt-crisis.pdf, 15.). In the early months of the pandemic in 2020, the IMF offered to open up new windows for borrowing that they said would come without conditionalities. (Kristalina Georgieva, ‘The Next Phase of the Crisis: Further Action Needed for a Resilient Recovery’, IMF (blog), 16 July 2020, https://www.imf.org/en/Blogs/Articles/2020/07/16/blog-g20-md-the-next-phase-of-the-crisis-further-action-needed-for-a-resilient-recovery.).

The G20 Debt Service Suspension Initiative and other such offers to pause debt payments suggested that the poorer nations would receive assistance to prevent total economic collapse and to gain access to vaccines. However, Oxfam found that thirteen of the fifteen IMF loan programmes during the second year of the pandemic (2021) required ‘new austerity measures such as taxes on food and fuel or spending cuts that could put vital public services at risk’. (Oxfam International, ‘IMF Must Abandon Demands for Austerity as Cost-of-Living Crisis Drives up Hunger and Poverty Worldwide’, Oxfam Press Release, 19 April 2022, https://www.oxfam.org/en/press-releases/imf-must-abandon-demands-austerity-cost-living-crisis-drives-hunger-and-poverty.) The Commitment to Reducing Inequality Index reveals that fourteen out of the sixteen countries in West Africa planned to cut their budgets by a total of $26.8 billion in 2021 to contain haemorrhaging national debt crises and that these policies have been encouraged by the IMF’s COVID-19 loans. (Matthew Martin et al., The West Africa Inequality Crisis: Fighting Austerity and the Pandemic, Oxfam and Development Finance International, 14 October 2021, https://oxfamilibrary.openrepository.com/bitstream/handle/10546/621300/rr-west-africa-cri-austerity-pandemic-141021-en.pdf, 4, 19.).

The evidence is clear: the IMF not only engineers austerity-driven debt crises, but its policies are designed to ensure and manage a permanent debt crisis, not to erase debt.

Fred M’membe
President of the Socialist Party

IMF offers us no viable exit from a permanent debt crisis.

IMF offers us no viable exit from a permanent debt crisis. Featured

Before the COVID-19 pandemic was announced by the World Health Organisation in March 2020, our poorer nations already struggled with seriously high – and unpayable – levels of debt. Between 2011 and 2019, the World Bank reported, “public debt in a sample of 65 developing countries increased by 18 per cent of GDP on average – and by much more in several cases. In sub-Saharan Africa, for example, debt increased by 27 per cent of GDP on average” (Marcello Estevão and Sebastian Essl, ‘When the Debt Crises Hit, Don’t Simply Blame the Pandemic’, World Bank (blog), 28 June 2022, (https://blogs.worldbank.org/…/when-debt-crises-hit-dont…).

The debt crisis did not take place because of government spending on long-term infrastructure projects, which could eventually pay for themselves by increasing growth rates and allow these countries to exit from a permanent debt crisis. Rather, these governments borrowed money upon borrowed money to pay off older debts to wealthy bondholders, as well as to pay for their current bills (such as to maintain education, health, and basic civic services). “Among the thirty-three sub-Saharan countries in our sample”, the World Bank noted, “current spending outstripped capital investment by a ratio of nearly three to one” (Estevão and Essl, ‘When the Debt Crises Hit, Don’t Simply Blame the Pandemic’).

When the pandemic struck, countries that had adopted the World Bank-International Monetary Fund policy to grow their way out of the debt crisis floundered. Growth rates shrank, which meant that debt volumes ballooned, and so these governments decided to borrow more and adopt deeper austerity policies, which dramatically increased the debt burden on their populations.

Registering, in their own way, what is universally acknowledged as an intractable debt crisis in the poorer nations, the International Monetary Fund (IMF) warned that a serious banking crisis is likely to emerge (while ignoring the factors driving this scenario). “Our updated global bank stress test shows that, in a severely adverse scenario, up to 29 per cent of emerging market banks would breach capital requirements”, the IMF wrote in October 2022.(International Monetary Fund, Global Financial Stability Report – Navigating the High-Inflation Environment (Washington, DC: IMF, October 2022),https://www.imf.org/…/global-financial-stability-report…).

This means that the context of high debt, high inflation, and low growth rates (with lowered employment expectations) could lead to the collapse of a third of the banks in the poorer nations.

Neither the IMF nor the World Bank nor indeed any of the international financial institutions (IFIs) have any credible pathway out of this crisis. Indeed, the IMF report surrenders to reality as it tells central banks across the globe to “avoid a de-anchoring of inflation expectations” and to ensure that “the tightening of financial conditions needs to be calibrated carefully, to aim at avoiding disorderly market conditions that could put financial stability unduly at risk”. (IMF, Global Financial Stability Report, ix).

The focus here is to keep ‘the market’ happy, while there is remarkably no care for the downward spiral of living conditions for the vast majority of the people on the planet. In its October 2022 Fiscal Monitor Report, subtitled ‘Helping People Bounce Back’, the IMF noted that while governments’ top priorities must be “to ensure everyone has access to affordable food and to protect low-income households from rising inflation”, they must not attempt “to limit price increases through price controls, subsidies, or tax cuts”, which would “be costly to the budget and ultimately ineffective”. (International Monetary Fund, Fiscal Monitor: Helping People Bounce Back (Washington, DC: IMF, October 2022), https://www.imf.org/…/2022/10/09/fiscal-monitor-october-22).

In January 2023, the IMF’s World Economic Outlook predicted a slightly better, albeit ‘subpar’, growth forecast but warned of continued worries of debt distress in the poorer nations, writing that “The combination of high debt levels from the pandemic, lower growth, and higher borrowing costs exacerbates the vulnerability of these economies, especially those with significant near-term dollar financing needs”. (International Monetary Fund, World Economic Outlook Update: Inflation Peaking amid Low Growth (IMF, January 2023), https://www.imf.org/…/world-economic-outlook-update…).

The antidote to debt distress, according to the IMF, is “fiscal consolidation and growth-enhancing supply-side reforms”, namely more of the same old austerity-debt trap. If the governments of the poorer nations are told not to use these basic tools (which are used routinely in the richer nations), their only choice – as far as the IMF is concerned – is to borrow in order to provide even low levels of relief to the very poorest people in their countries. Effectively, the IMF has surrendered to the prevailing reality and offers the poorer nations no viable exit from a permanent debt crisis.

Fred M’membe President of the Socialist Party

Debt

Debt Featured

We think it’s mischievous to say all benchmarks have been met when the IMF statement clearly sets out conditions to progress with the disbursement of US$188 million subject to financing assurances from debt restructuring.

How can they say all benchmarks have been met when there are outstanding conditions set out in the IMF statement? How can one be confident of the outcome when there are preconditions that have still not been met?

While we support the speedy conclusion of debt restructuring, we are not confident because the Minister of Finance has made numerous statements and given timelines in which they were expected to conclude the issue – timelines that have come and gone. How can one be confident when they keep changing timelines?

Secondly, the issue of debt restructuring being a panacea for our economic challenges is being amplified.

Over the past two years we have not been servicing our debt, so where have the savings gone? Once debt restructuring is concluded we will have to start paying the currently suspended debt, meaning we will have less money than we have had in the past two years. Will this solve our economic challenges? The answer is a categorical NO.

The real solution lies in formulating an internal system; an economic recovery plan focusing on industrialisation, expanding our existing manufacturing capacities – and introducing new ones – sound agriculture policy, reviewing tax waivers provided to the mining and other sectors, and energy sector reforms, among other things.

What is needed is to adopt a non-favourite child policy; to treat all creditors the same and engage with each credit category on a bilateral basis, in addition to the G20 Common Framework.

Fred M’membePresident of Socialist Party Zambia

It’s time to do our own thing

It’s time to do our own thing Featured

It’s time to move away from Western economic hegemony and dictatorship and see things for ourselves, analyse things for ourselves and come to our conclusions.

We have been swallowing their recipes without chewing and blindly following their prescriptions. It’s time to take our own paths – and every path is different.

For example, take inflation targeting used blindly by the Bank of Zambia through interest rate hikes, it does not work for our country because very few Zambian companies/SMEs and individuals have access to credit which is used as a transmission mechanism for interest rate hikes in the hope that it subdues expenditure consequently bringing down inflation. But this cannot work in Zambia because very few people have credit and therefore not directly impacted by rate hikes.

By contrast in the Western world and a few African countries like South Africa literally everyone there has a credit facility – be it contract phone, domestic equipment/furniture hire purchase, credit card, home and motor vehicle finance and so on and so forth.

Those who disagree with what we are saying let them explain to us how this works in Zambia!

We know this is what the World Bank and the International Monetary Fund recommend. But is it working, is it the right way to go?

Fred M’membe
President of the Socialist Party