The IMF Should Stick to Its Guns
(Bloomberg Opinion) -- This week marks a change of focus for the International Monetary Fund — and a new set of challenges. On Monday, Greece finally exited its IMF-led bailout program, albeit with an enormous amount of debt still weighing on its economic future. The wrangles over Greece haven’t just further damaged the IMF’s image; they helped spark a major reevaluation within the organization of the conditions attached to its lending. For years, developing countries have argued that the IMF — dominated by wealthy nations — is biased, reserving its harshest medicine for non-white, non-Western countries. Now, another debate is growing at the IMF, one that may well be framed in similar terms. In this case, however, the Fund and its Western backers should stand firm.
In one of his first speeches, Pakistan’s new Prime Minister Imran Khan went on television on Monday to ask Pakistanis living abroad to send money home. Everyone knows why: The country is facing a ballooning current account deficit. The central bank’s dollar reserves cover imports only for a month and a bit. A country in this situation would normally turn to the IMF for help.
Khan clearly wants to avoid that — and, again, everyone knows why. China wouldn’t like it.
What happens when countries such as Pakistan with cash flow problems go to the IMF? The Fund, like any other lender, expects to see your books. Its officials then scrutinize your spending and tell you where to cut down. Often, this results in public spending collapsing and living standards suffering. This is generally why nobody likes the IMF.
Pakistan’s case is different. Here, the problem is that the government doesn’t want to open up its books to the IMF in the first place. That’s because if it does, the world will see the full extent of its problems — in particular, the usurious terms attached to Chinese infrastructure investment. The Wall Street Journal has discovered that some Chinese-funded thermal power plants, for example, are supposed to pay 34 percent a year. For 30 years. In dollars. Guaranteed.
That’s the kind of deal the IMF would typically expect you to renegotiate or abandon. And indeed, if such details are confirmed, the political backlash against Chinese investment in Pakistan would be severe.
Meanwhile, the possible bailout is shaping up into something of a battle between the U.S. and China. Secretary of State Mike Pompeo said last month that there was “no rationale” for IMF money — by extension, American tax dollars, since the U.S. is the biggest contributor to the Fund — “to go to bail out Chinese bondholders or China itself.” At the same time, the Chinese are notoriously secretive about the terms of their lending. They’re going to be quite unhappy about the transparency required for any bailout.
For the IMF, this is going to be the first test of a new age. The era of financial crisis is behind us; the era of political crisis has begun. It’s no coincidence that the two countries closest to the brink financially right now are both struggling to avoid an IMF bailout, and both for geopolitical reasons.
Turkey’s leader Recep Tayyip Erdogan made a point of minimizing the IMF’s role in the country’s mid-2000s economic revival and is trying everything to avoid allowing the Fund back in now. This is hardly surprising: He’s also in the middle of a confrontation with Washington. In those circumstances, how can he be seen to trust an organization in which the U.S. continues to exert disproportionate power?
For his part, Khan seems more comfortable asking ask overseas Pakistanis, the Chinese or even the Saudis for help rather than sharing Pakistan’s accounts with a Western-dominated multilateral organization. In both cases, too, it’s far from certain that the U.S. administration would allow the IMF to go about business as usual without making demands influenced by its own geopolitical agenda.
Nobody likes the IMF, and it’s easy to find good arguments for why it should become less dominated by the U.S. and Europe. I’ve made those arguments myself in the past. But, that’s no longer what even non-Western countries should be most worried about. We’ve spent so long complaining about the costs of IMF bailouts that we’ve forgotten how dangerous a world without the institution would be. Turkey’s government needs a check on its economic missteps; Pakistan needs someone to break its debilitating dependence on China. And the world needs a financial stabilizer that’s independent of the disruptions rippling out from the White House.
As Greece’s epic tragedy showed, the IMF is far from perfect. But, the Fund needs to hold firm to its principles — transparency and fidelity to basic, rational, neoclassical economics — if the world is to handle the turbulence to come.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mihir Sharma is a Bloomberg Opinion columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”
©2018 Bloomberg L.P.