IMF needs to revisit its policies By ASAD RIZVI

ARTICLE (April 06 2010): Prior to negotiations with the IMF, it is important for any borrowing nation to understand this international agency's terms and conditions. The IMF has a record of imposing hash conditions, but there is hardly any evidence to the fact that its policies have provided any respite to ailing economies.

Hence, the IMF should reconsider its rigid stance of controlling the economy of any borrowing country. It should rather adopt an open-door policy stance by striking a delicate balance so that the economies of the borrowing countries are provided with enough breathing space and enabled to make the much-needed recovery.

Re-basing of Currency (Zimbabwe dollar or Iraqi dinar, eg 10.000 Iraqi dinar becomes IQD 10) or Devaluation/depreciation of currency is no more effective unless a country is self-sufficient in goods that it produces and is able to export abroad at cheap rates, but if the exports of a country are dependent on an import-led growth then devaluation/depreciation becomes ineffective, due to a sharp volatility among major global currencies and frequent economic changes. It also eats into foreign exchange reserves and promotes inflation.

The IMF policy of asking a borrowing country to apply sudden brakes on its growth and development expenditure to contain inflation and reduce fiscal deficit is no more workable for a heavily indebted country, because if the country stops spending there will be more job losses, revenue will fall and debt burden will continue to pile up, though it may help in reducing the deficit. But, such polices are not sustainable from growth perspective.

The policy adopted by USA is one good example, which is clearly against IMF's norms and stipulations. Although, it has a budget deficit of 10.5 percent and a national debt of USD 12.5 trillion, the country has been employing zero interest rate policy as its central bank (FED) has opted for easy liquidity conditions to stimulate growth. The American economy is totally dependent on foreign borrowings and printing of currency notes.

The emphasis of the IMF should be on obtaining an undertaking that the borrowed money would not go waste; more jobs will be created. The borrower should pledge at the time of signing stand-by arrangement that value added exports would be increased and an effort would be made to ease the burden on foreign exchange. Economic policies that help generate revenue and reduce domestic debt should be encouraged. Interest rate environment should be made friendlier to support growth and reduce poverty. Since the country signing the agreement faces economic hardship, it can neither borrow money comfortably from international market due to poor credit ratings that pushes borrowing cost higher, nor can it privatise the government institutions due to bad domestic market conditions. Therefore, grace period should be given to the borrower so that it gets adequate or sufficient time to mend its economy.

With the changing global business environment, the IMF should reconsider its policy towards a borrowing country, which requires key structural changes.

The basic idea of IMF bailout should be to plug the leakages in the economy. Utilisation of its money should be in such an effective manner that it should help in bringing the economy back on track. Therefore, it should also assist the country in getting easy access to international market for trade purpose and help in temporary increase in quota to improve current account and balance of payment positions.

IMF should also ensure that the politicians of a borrowing country are not allowed to misuse its funds. Hiring of the professionals should be a prerequisite. The Fund should also lay emphasis on transparency and meritocracy.

It is noted with regret that after the global meltdown, the IMF bailout policies brought no respite to borrowers. These have not resulted in creating new jobs. Initially, the IMF made 16 standby commitments of $45 billion. The number is likely to increase.

The real test for IMF would be Greece that has a debt of Euro 254 billion while the size of its entire GDP is Euro 251 billion. Its debt to GDP ratio is 101 percent. Greece is part of the Euro zone nations commonly known as PIIGS countries. PIIGS stands for Portugal, Ireland, Italy, Greece and Spain. They all borrowed huge sums of money during good times. They have problems such as political spending, oversize debt, fiscal indiscipline, rising unemployment ranging between 10 percent to 19.5 percent and a large budget deficit, which is mostly above 10 percent.- The writer is a former bank treasurer.

Source: http://www.brecorder.com/index.php?id=1041235&currPageNo=1&query=&search=&term=&supDate=