IMF Loans: The Money We Do Not Need?
A controversial event took place next to the International Monetary Fund (IMF) office in the middle of the summer in Washington, DC.
Dozens of Belarusians stretched eye-catching posters encouraging the IMF to assist Belarus. The protesters wore the masks of the Belarusian leader Alexander Lukashenka and explained their reasoning, for instance, with phrases like "The dictatorship is very expensive" or “I need money for the KGB!”.
The protest's appeal was its irony. Despite a very attractive and media-wise approach, however, the purpose of it remained quite ambiguous. The strikers protested against IMF and similar institutions, which, as they claim, support the current regime in Belarus. The question remains, whether the IMF actually strengthens the current administration or is simply helping Belarusians not to die out.
Why the IMF is ready to support empty-handed countries?
International altruism rarely happens. The IMF, as is true with most of international organisations, cannot stay politically neutral, while it pursues the interests of its member states. Otherwise, no other reason exists to create such an organisation.
What do rich countries expect from the IMF? They simply want the entire financial system in the world running smoothly, because once it stumbles in one country, the domino effect might influence others. If something goes wrong in a developing country, it affects its neighbours, its partners and, in the long run, even the most developed and wealthiest countries. None of the countries in the world lives in a complete vacuum. Even North Korea, who is heavily dependent on China with its exports and imports, still has other trading partners.
The IMF usually supports low-income and developing countries to fix the trade balances by covering the gaps between exports and imports. Developing countries become special links in the chain to worry about, particularly if they are more prone to the breakdowns than other countries. For instance, Greece's default could cause a financial crisis that could spread on the entire Eurozone.
As a developing country, Belarus draws its loans from a special IMF fund called the Poverty Reduction and Growth Trust (PRGT). Its money covers the difference, when a country buys more than it actually sells. The Belarusian government cannot "buy votes" with the IMF, since it can neither cash in on these funds, nor use it to increase the salaries of public sector employees and or boost retirement plans. Belarus, however, has other opportunities to abuse the money it receives from the fund.
How could the IMF money be misused?
Recipient countries can misapply IMF funds by using the borrowed money for even more imports. Instead of improving the situation with trade balances, a country can increase the gap by importing even more with the IMF's funds and simply postponing payments back. Despite breaking the rules, the recipient country stands to receive significant benefits. IMF loans can create additional positive effects like when financial and monetary reforms take place in the recipient country. Basically, while postponing the debt to be paid later on, Belarus would still have to conduct necessary reforms requested by the IMF.
Inappropriate application of funds also occur when a recipient country reinvests IMF money elsewhere while gaining even more money from outside. The IMF lends with very favourable conditions for the borrower in terms of the interest rate. Let's say the Belarusian government receives its money from the IMF and uses it to buy the U.S. state bonds, euros, British pounds or Japanese yen. This reinvestment has very low interest rates, but the profit gained still exceeds the interest that a recipient country has to pay back to the IMF. With the current political situation, however, the scenario of American or European governments letting Belarus reinvest seems unlikely.
More realistically, the Belarusian government may exploit the IMF funds by indeed using it to cover any excess imports, but it should be noted that only the political elite makes foreign purchases. This happens when the political elite buys from outside exclusively for its own consumption. In this case, the products bought with the IMF money benefit a very closed group.
Let's say this happens in our country and, thus, we say a firm "no" to the IMF. Belarus would have to limit its import transactions of larger pro-governmental enterprises. But remember the domino effect? Rejecting the IMF funds will negatively affect everybody in Belarus. Larger organisations taken out of the game will block the imports of all the small and medium enterprises (SME). The SME sector mainly consists of private little businesses not related to the government that behave independently from it as much as they can in a very centralised country.
With all the regime constraints in place, small and medium enterprises face difficulties in launching and keeping their private businesses open in Belarus, though strongest have managed to keep their doors open. Half legally and half illegally, they do exist. The protesters in front of the IMF building do not seem concerned about what is going to happen to these businesses if Belarus will not receive IMF loans. Do the 9.5 million people residing in Belarus deserve the suffering caused by punishing a couple of bad guys in pro-governmental enterprises?
Pursuing similar goals
In truth, the IMF only resembles a charitable organisation. The developed member states stop investing in a country, if, instead of improving the country's poor state, it keeps on asking for more financial assistance. The rich countries support others to develop trustworthy partners that they can work with. Thus, any loan from IMF comes with the conditions to make the government more transparent and to open up to the global economy.
Recent IMF recommendations include limiting wage increases to target the inflation, maintaining exchange rate flexibility and curbing high foreign exchange lending growth, tighten liquidity, and adopting comprehensive and ambitious structural reforms. In order to free up liquidity, the IMF policy invites such measures as selling off state assets and cuts in vital government spending, which in Belarus' case might mean the privatisation of state enterprises and cuts in major governmental expenses such as the police force, for instance. In striking against the IMF, Belarusians are at the same time protesting against these improvements in Belarus.
The protesters gathered in front of the IMF building this summer would support these reforms. That is exactly what the IMF wants from Belarus as well. Even if the IMF does not act as if it is Belarus' best friend, it remains a good partner that is pursuing the same changes consistently in Belarus. Right now, the interests of the IMF and the interests of the majority of Belarusian people coincide.
Before going continuing to protest against the IMF, we should understand what the IMF expects from Belarus. Those Belarusians who advocate for democratisation through reforms should understand that the IMF, led by its main donors, has the same vision for change in Belarus. Belarusians would benefit more if civil society organisations would protest for as the lowest possible interest rates on IMF loans rather than struggling against the receiving the funds in the first place.
Palina is a PhD Candidate in Public Affairs at Florida International University