During the global financial crisis of 2008-09, lending by the International Monetary Fund (IMF) surged as countries faced acute financing shortfalls amid the economic turmoil. However, as with most IMF credit over the years, these crisis loans came attached with contractionary policy conditionalities whose procyclical nature has long been a cause for concern. Examining the provisions in the official IMF loan documents, this paper finds that the IMF required borrowing countries to implement austerity measures in fiscal and monetary policy to attain "macroeconomic stability" or, in other words, low levels of deficit, inflation and external debt. Government budget deficits and inflation were to be brought down by cutting public spending and raising interest rates, among other measures such as regressive tax policies.
In light of concern over the adverse impacts of such austerity policies in a time of global downturn, this paper recommends a rethink of procyclical IMF loan conditionality. In the context of global crisis contagion, policy-setting international financial institutions should not be advocating budget cuts and interest rate hikes. Rather, expansionary, or Keynesian, macroeconomic policy should be supported in crisis-affected countries, such as fiscal stimulus and public spending measures to revive domestic economic activity, aid domestic firms and citizens severely affected by the crisis, promote employment creation and protect essential services in health, education and pension sectors. In addition to this policy reassessment, the paper also calls for reform in IMF governance, such as tranparency in the formulation and distribution of IMF policy reports and fair representation and voice for developing countries in the Fund's decision-making.
This product was added to our catalog on Tuesday 03 January, 2012.