The IMF has strongly denied that its mission to boost its
status as global lender has undermined policy reform efforts in
borrowing nations, amid growing criticism of Funds new
flexible lending policies from hawkish observers.
This crisis is different. This is the crisis where the
whole world is in a recession and we need to tailor programmes
accordingly, Lorenzo Giorgianni, chief of emerging
markets division at the IMFs strategy, policy, and review
department, said in an interview with Emerging Markets
in Istanbul yesterday.
The IMF earlier this year startled markets by unexpectedly
sanctioning large fiscal deficits in Ukraine and Hungary, and
by expanding its large programme for Pakistan.
When the IMFs programme for Ukraine was launched last
year, the Fund recommended a balanced budget, but then
sanctioned a deficit of 4% of GDP. Now it has agreed to a
deficit of 6% for general budgetary purposes plus 2.6% for
state-owned energy company Naftogaz Ukrainy.
And after torturous bargaining with Latvia, the Fund also
relaxed its fiscal criteria during the summer.
Giorgianni said the structure of IMF lending has been biased
toward fiscal policy rather than monetary support, due to the
collapse of private sector economic activity in the teeth of
the global slump.
Monetary policy has been relatively ineffective, as
banking systems had problems across the globe. So there has
been a greater emphasis on fiscal policy to carry the load [of
policy-led economic stimulus], Giorgianni said.
In November last year, the IMF approved a $7.6 billion
stand-by arrangement with Pakistan that was upsized by an
additional $3.2 billion to fund social programmes. However,
observers argue that the country is relaxing its fiscal
policies this year, and interest rates remain too low, while
the IMF has not imposed structural reforms necessary for
Ashfaque Khan, a former economic advisor to the
Pakistan finance ministry (1998-2009), told Emerging
Markets: It is strange that the IMF has allowed its
resources to be used for budgetary reasons instead of
balance-of-payments support. This is a major departure from the
past it is as if the IMF has changed its
He added: The government has become impatient while
the IMF has also forgotten its own lesson of a sound fiscal
position, so vital for achieving macroeconomic stability.
The countrys fiscal deficit for the 2008-09 fiscal year
stands at 5.8%, exceeding the government target by 0.9%.
Giorgianni said the Fund has learned lessons from the 1997
Asia crisis, when it called for fiscal austerity and interest
rate hikes to stabilize currencies and reduce import demand to
correct current account balances. These policies were
criticized for triggering a self-reinforcing contraction that
further destabilized the region and has stigmatised the lender
of last of resort in the region.
The Funds new approach had garnered goodwill among
borrowers that has brought more [government] ownership in
IMF programmes and so performance [observance of IMF criteria]
has been better than the past, Giorgianni said.
He denied that the IMF is giving into government pressure to
continue spending, which threatens to delay the necessary
policy adjustment. There are some that say the best time
to make reforms is in the midst of crisis, but this could be
more costly to society. [...] Reforms need to be more