The International Monetary Fund (IMF) has proven an unlikely countervailing force to the disrepair of international institutions exposed by the pandemic and worsened by nationalism and populism.
By Patrick Smith
For decades, the IMF had been excoriated for its loans conditional on fiscal austerity policies and adopting “one-size fits all” measures resulting in reductions to health, education and other social expenditures.
Yet in 2020 as the pandemic ripped through economies destroying jobs, closing down businesses and up-ending budgets, the IMF led the international financial response particularly in Africa, Latin America and Asia.
In less than nine months, the IMF approved fast-track loans of $16.2bn to African states and $63.8bn to Latin American and Caribbean states – about ten times its usual volume of lending in that timeframe. Of the more than 100 programmes approved globally worth over $88bn, conditions were attached to just 13 of the credits.
A study by US-based economists Kevin Gallagher and Maldonado Carlin, based on their IMF COVID-19 Recovery Index, concluded the IMF’s response has “proven to be far less conditioned on fiscal austerity and has prioritised health expenditure and social spending to attack the coronavirus and protect the vulnerable.”
In an interview with Abebe Aemro Selassie, director of the Africa Department of the IMF, tells The Africa Report how the fund’s approach has changed: “When a war starts, I guess everything has to be about training resources on ending it as quickly as possible and then rebuilding. We felt compelled to respond the way that we have.”
How much more the IMF will be able to do in 2021 will depend on its resources and the demands on its $1trn war chest. Many countries had called for a new issuance of Special Drawing Rights (SDRs) the IMF’s international reserve assets) to boost global liquidity, as was done in the 2008-2009 financial crisis.
But the administration of US President Donald Trump strongly opposed the issuing more SDRs: “There are things which are under our control and others that are more in the political process,” explains Abebe. “Issuing SDRs requires the membership to endorse it. That consensus wasn’t there. Even in 2009, once the political decision was made to issue SDRs, we took 5-6 months before the allocation was finalised.”
On African governments’ responses to the pandemic, Abebe says the speed and technical innovation of policies put in place had worked in public health terms: “This has been a year where Africa was tested, like never before, and in terms of institutional capacity, its ability to deal with this pandemic.”
The economic and social costs of the response played out much faster in Africa than in Europe or North America: “What has really impressed me is the decisiveness of governments in terms of the measures they took […] when the vast majority of the population relies on informal activities […] and closing borders. If you think about how hard they were in the West, you can imagine how much harder they were in Africa?”
Those policy choices are set to get tougher in 2021 with the focus on adapting economic strategies to the new conditions, and the effects of a second wave of the pandemic, especially in Southern Africa. Those choices will include, says Abebe, how much more Africa’s central banks can do to boost liquidity and ease monetary conditions – but without the huge reserves of their Western counterparts.
Looming over policy-makers is the outflow of capital from emerging and frontier markets –– as much as two-thirds of the foreign capital in those markets –- at the height of the pandemic. The IMF has been appealing, says Abebe, to the credit ratings agencies to take a more nuanced look at Africa’s economies and their particularities.
Closely tied with that are governments’ choices on sources of capital, revenue and taxation policies. “You have governments facing a trilemma,” says Abebe.
- “One leg is that everybody’s concerned about debt.”
- “A second element is that people still want more development spending, in education, electricity access, infrastructure.”
- “And then the third element is that there is often resistance or reluctance to pay the full share of taxes.”
Coordination and negotiation
For the international system and African economies alike, the two issues demanding most coordination and negotiation will be the mounting debt service obligations and the effects of the climate crisis.
Abebe argues that the coordination and common framework on debt agreed so far with bilateral creditors – Paris Club, China and the Gulf States – is an important step but that much more will need to be done this year in what he describes as a “much more creditor landscape”.
He also warns that there will have to be a different approach with commercial creditors, given the wide range of arrangements in place and the differing levels of financial sustainability in debtor countries. The question of how multilateral institutions such as the IMF, World Bank and the African Development Bank can ease countries’ payments pressures will be key to a more coordinated international initiative on debt.
France’s President Emmanuel Macron has suggested the Paris Club should be prepared to write off some debts. Others propose that the multilateral institutions should do the same in a follow-up to the Heavily Indebted Poor Country initiative.
Looming much larger and more threateningly in the wake of the pandemic is the accelerating climate crisis and the need for a much more robust global response. At the IMF’s and World Bank’s Spring meetings in April 2020, IMF managing director Kristalina Georgieva said the pandemic would test the institutions as never before. “For our world to become more resilient, we must do everything in our power to promote a green recovery,” she argued.
That is now central to IMF policy thinking, according to Abebe, along with ways to cut inequality. “We’ve been a source of a lot of the push on carbon taxation, on the climate mitigation front. We’ve been advocating for making sure that you have the right type of carbon tax framework to help decarbonise the global economy and incentivising that.”
Given the vested interests opposing carbon taxation, indeed any constraints on the oil and coal industries, those policy shifts will see substantial organised pushback among some IMF member states and other organisations.
That’s also clear from Gallagher and Carlin’s assessment of the IMF response to the pandemic, which gave high marks on financial adaptability but much lower ratings for its policies for a “green recovery”. Some climate advocates fear that new financial stringencies could water down those policies still further.
As the balances in national and international institutional treasuries are checked this year, with the prospect of a second wave of economic damage linked to the latest surge in coronavirus cases in Europe and the Americas, campaigners for a green new deal will have to push ever harder to get their case across.
The Africa Report: The IMF has been winning plaudits from supporters and sceptics alike for its response to the pandemic: releasing money quickly to cash-strapped countries without onerous conditions. What has brought this about? What are the bigger organisational and philosophical changes behind it?
Abebe Aemro Selassie: It’s not something that we’re complacent about. We feel like we can and we could and we need to do more to support the [Africa] region policy advice-wise, financing and to rally the international community. This is not just for our region but globally quite frankly, given the scale of the crisis.
We have had a change over the years – like I used to say: “This is not your grandfather’s IMF”. I think that has been put on steroids by Kristalina Georgieva [the Bulgarian economist who was appointed managing director of the IMF in 2019]. The true test of an institution is when you’re faced with something that’s in your calling, right? The raison d’être for the IMF is to help sovereigns when they are in distress. This is the kind of shock which I don’t think even our founders expected.
So we have to show what we’re there for – to provide support. When a war starts I guess everything has to be about training resources on ending it as quickly as possible and then rebuilding. We felt compelled to respond the way that we have.
The IMF has about $1trn available. Many say that won’t be enough. Where the plans to find more resources – such as issuing Special Drawing Rights [SDRs, the IMF’s international reserve assets to supplement member states’ official reserves]?
We looked very early on at all of the toolkits that would be possible to help the membership with. So we are the ones that put on the table an SDR allocation as one of the things that had to be considered. We, of course, have existing resources and we showed we have incredible nimbleness to repurpose those resources to the moment and to expand the limits. Then we also started fundraising for existing resources.
So there are things which are under our control and others that are more in the political process. Issuing SDRs requires the membership to endorse it. That consensus wasn’t there. Even in 2009, once the political decision was made to issue SDRs, we took 5-6 months before the allocation was finalised.
So we did not just put that on the table and stop there. But rather we started working with existing instruments. So we’ve applied those as much as possible and done some fundraising and debt relief for the poorest countries. We need more funding to continue to do debt relief in 2021 on repayments due to us.
We’ve done some fundraising for the resources that we have for the Poverty Reduction and Growth Trust. So we have replenished the kitty, but we envisage the fund needing to play an even bigger financing role in the coming years simply to facilitate a recovery.
What specific demands – such as debt relief for Sudan – on IMF resources do you foresee?
I think for Sudan but also more broadly also to enable us to have adequate resources to play a strongly counter-cyclical financing role. The region is facing in the coming years, we think, lower private-sector flows than in the pre-crisis period. I think temporarily the fund may need to play a stepped-up role and we need to be adequately resourced for that.
The pandemic has radically changed your working arrangements, some officials working from home and some outside their regional bases. How will your working practices adapt over the next few years?
For us as staff members, one of our biggest reliefs has been our ability to lend about 10 times more in volume to Africa as a whole – despite the different surroundings that we’re working in. It is an operational nimbleness: we have our staff working all hours from home, with kids in the background. That has made me proud as a manager for us not having failed our region.
We have not been constrained in the depth of the debt-policy dialogue. Quite a lot of our representatives remain on the ground but have to work from home, for example, in Accra or Abidjan. So, we continue to get a feel for what’s going on, In other countries, some of our resident representatives have had to move out for various family reasons.
But we still have quite a bit of presence and I think going forward really a lot will depend on how quickly the vaccine is rolled out. My hope would be that by next summer, like everyone else, we are close to normal. Whatever normality post-COVID will be.
How do you assess the policy response of African governments to the pandemic? Which ideas have worked and which haven’t?
The first thing to say is that this has been a year where Africa was tested, like never before, and in terms of institutional capacity, its ability to deal with this pandemic. What has really impressed me is the decisiveness of governments in terms of the measures they took, telling people to stay at home when they rely on driving taxis, when the vast majority of the population relies on informal activities, and closing borders. These have all been incredibly hard decisions. If you think about how hard they were in the West, you can imagine how much harder they were in Africa? I think having the wherewithal to take those decisions, stop the number of cases coming into your country, et cetera, it’s something for which we have to credit the governments.
I speak here of the vast majority of governments. Early on, we kept seeing people traveling to the region being asked for COVID tests. The kind of test and tracing in places like Uganda was really impressive versus what you saw in many Western countries.
Secondly, on economics, I think governments have done all that they can to respond by increasing spending on health, rolling out social safety nets in innovative ways. The programme in Togo has been cited for its support for enterprises, for the banking sector, not quite forgiveness of loans but forbearance. Countries have used whatever tools that they could to support activity. There is Rwanda’s food support programme to people; all kinds of programmes. How effective these programs have been, time will tell.
This has been a year where we’ve seen Africa being challenged big time with this shock, and the vast majority of countries rising to the occasion in a very impressive way.
What about other policy options? Some in Africa argue that as Western economies have abandoned economic orthodoxy, now is the time for African states to try more radical policies such as printing money.
One of the first things we started looking at, beyond the easing of monetary conditions to support economic activity, was how else could central banks could support more fiscal spending – if that’s what was needed.
This has been a year where you’ve seen quite a bit of central banks, beyond adjusting interest rates, have also learned forward by way of creating special facilities for governments to use. You don’t want to dictate too much how that is done, whether directly by lending directly to the government or by rediscounting what commercial banks are doing. The key is really the monetary easing that you want to see. And we’ve seen that happening quite a bit in the region.
You have commercial banks able to rediscount to the central bank or lend at much more favourable interest rates. Given that we have a moment where the private sector is not borrowing as much, that actually can be a much better way in which monetary policy can be helpful the normal functioning of the markets.
Since the start of the pandemic, there has been an accelerating outflow of finance from Africa. How will that affect the region’s economies and how long will it take for some of those flows to return?
The region has been hit by this brutal health shock tied with an economic shock, where governments have to take policies to depress demand. But it was also a bunch of exogenous things – oil prices, commodity prices declining, capital reversing – going on around all this. You had what my colleague has been calling this brutal cocktail of shocks that has hit the region.
Now on capital flows, I think markets do not discriminate enough amongst African countries. They don’t recognise the differences in circumstances and tend to treat all countries as a single asset class. That’s why you saw kind of this massive outflow whether you are in Senegal or Kenya or South Africa … money just left.
I think over time global financial conditions will have eased. We’ve seen some differentiation of it culminating, most recently in Côte d’Ivoire being able to tap the markets at an interest rate that it had never seen.
We have this expression in Amharic that even honey can be too much. So, in terms of how countries should treat this: [they can] rely on this financing only to the extent that it helps them manage a healthy balance between development and keeping debt sustainable.
If you have access to cheap financing and it makes sense to retire more expensive debt, of course it can make sense to tap markets. But just because it’s out there and available it doesn’t mean you should go and take up all of the cheap money because that’s the road to ruin. These cycles happened globally, but countries have to behave in terms of what makes sense rather than just gorging on the available financing.
Many governments have concerns about the ratings agencies, for example the triple downgrade in South Africa. How does the IMF work in that relationship between its member countries and the ratings agencies that consult you?
The ratings agencies are governed by whoever their regulators are. The question that often arises is that they are very pro-cyclical and, or take positions which sometimes lack economic logic. For example, when the G20 came out and offered the Debt Service Suspension Initiative (DSSI), which was something that improved the liquidity position of countries, some ratings agencies said that applying to the DSSI would be something that may have a bearing on how debt is assessed.
It’s not clear how and why, because there was no expectation that the private sector would be treated in a comparable way under the DSSI [which was restricted to public debt]. It’s in that context that questions have arisen to us from our member countries.
We have a role to help countries see through the ups and downs […] because we are the ones that have been there when everybody else has lost confidence to help support the policies that will get countries back.
We have to act in this counter-cyclical way. This is why when all this capital is flowing neither do we get excited and say everything is hunky-dory – nor when it stops coming and dries up, do we just give up.
Our role is to modulate and keep the focus on the fundamentals rather than being caught up in the market euphoria either when inflows are non-stop or when they leave.
There is still a lot of concern about capital flows currently. Officials are talking about tapping pensions funds, foreign exchange reserves and raising taxes. Do you see those as viable options?
What exactly do you want to finance? Is it the private-sector balance sheet, is it the sovereign that you’re worried about? Is it households? There is often kind of a conflation when this is being discussed, and I think it’s really important to think about it.
It’s always been the case that the private sector has had varied sources of financing. In South Africa, by far the biggest market, they rely a lot on equity-market financing. And then you’ll have some companies that go out and borrow abroad, by either banks or directly. You also have Standard Bank investing in Kenya and financing Kenyan banks.
And then the second one is the sovereign financing and what can governments rely on to finance themselves? In the past they’ve done so by issuing bonds abroad or borrowing domestically, and from the markets or banks.
So the question here is, can you get pension funds, for example, to buy more of your debt? In Uganda, the social security system could buy more government bonds rather than investing abroad.
At the margin, yes. But don’t forget those pension funds, those entities need a diversified portfolio for the same reasons that other asset managers do. Do you want to take risk on property, you want some foreign risk, some domestic risk. What are the downsides? You have to think through all of that.
Anyway, at the margin, is there hope for some pension funds to finance more domestic assets? Yes, but there are trade-offs to be made and you have to factor all of that in.
The broader question is for a year or two it makes sense absolutely to support the fiscal stance but ultimately you have to go back to a situation where financing has to be consistent with what you’re going to be able to repay over the long run.
So pension funds and foreign reserves can play a role in a country’s financing options, but there are other costs involved?
Yes. But foreign reserves, don’t forget, you can’t just tap into them because central banks have to hold liquid assets. So the pension funds are the ones that probably you can ask to hold more domestic assets, et cetera. But then again that could come at the expense of having a more diversified portfolio. This belongs to the pensioner, and over the long run they have to pay out, so you want to be careful there.
Beyond the diversification issue, there are other things about creating too much of a feedback loop between these funds and the government, but also undermining good public finance management principles. So there’s really a limit as to how much you can do here.
The point I’m making is that the financing challenge, the deficit challenge that governments face is not something that’s going to be amenable to just financial engineering. At the margin, a little bit. But fundamentally, it has to be resolved by reviewing what you’re spending money on, how much in taxes you’re raising and addressing that.
For a limited time, it absolutely makes sense to rely on deficit financing, but overall the deficit will be consistent with longer-term considerations.
It’s not a great time for African governments to say to their populations, even businesses, we’re going to raise money by putting your taxes up. Governments don’t want to depress incentives to expand businesses, at the same time they have to raise money to finance the deficit. How do they deal with that?
This is a huge issue, huge issue and it was a pressing issue already pre-crisis for most countries in the region.
You have governments facing a trilemma of sorts: one leg is that everybody’s concerned about debt, like
civil society in Kenya for example, or Zambia or South Africa.
A second element of the trilemma is that people still want the Kenyan, Zambian and South African government to invest more in schools, more development spending, in education, electricity access, infrastructure. So dimensional development is there. And then the third element is that there is often resistance or reluctance to pay the full share of taxes.
So how governments navigate this trilemma is going to determine how well they are able to keep track of economic stability and help foster development and growth. At the moment you have revenues collapsing, so the short-term agenda is about how to recover to pre-crisis levels in due course, over an optimal period.
But I think over the next four or five years, there’s no doubt that making progress with raising revenue is really fundamental to allowing all of the investments you need in schools and education, in infrastructure to really improve your growth prospects.
Nigeria is a classic example here. The federal government collects about 7%-8% of GDP a month in tax revenues. That is way too low to do all of the investment that you need in health, in education, in security services.
Getting that up to 14%-15% of GDP over the next five or eight years is going to be paramount. How you do that is to widen the tax base. There’s a lot of parts of the economy that should be paying some taxes, and they are not at the moment paying taxes.
There’s quite a lot of exemptions that our governments provide to either entice new investments or to large corporations. Those have to be closed off. The multinational firms have to pay their fair share. In each country it’s going to be different paying heed to domestic political considerations and preferences.
Continuing to finance yourself by borrowing is not going to be a feasible way forward because debt levels are already high.
A lot of countries are talking about boosting national production, changing trade routes and relationships. Where is the money for this going to come from? Is it going to be mainly a private-sector initiative with governments focusing on education, health and infrastructure? Did you get a sense of what building back is going to look like in Africa?
I think we will see for the next few years, some priority needing to be attached to social safety net programmes, to revert the spike in poverty that we’ve seen this year. We do think that more emphasis in human capital investment would make sense, to get everybody back closer to pre-crisis levels.
I mentioned about the need for thinking about revenues. A lot of attention is going to be needed there, if not for immediate payoff then putting in place agreements, building a social contract about over the next four to five years […] to expand the tax net gradually to capture more and more people.
‘This is a fair share of taxes that people need to pay’… laying that out, making use of digitisation to make things transparent, both on the spending side and on the revenue side. I think those kinds of priorities we see as being very important for the public sector.
I think how it’s up to the private sector how it finances itself, but governments are finding ways in which they can influence that.
Overall, what we see is this is an inflection point for the region. I think we’ve had 20-25 years of really strong development progress, really strong. I mean from where Africa is now relative to the early 1990s, I think there has been a great leap, they are night and day.
Countries are on a much better footing now than they were 30 years ago, institutions are better, political systems are more give and take, there’s a much better human capital endowment. I think we have another generation that can move things forward. But that will require also a transformation in the areas that I mentioned. I think that is the challenge: rethinking and rejigging development strategies to face that monumental challenge is what is needed here.
That means thinking about climate change, investing as much in digital networks as in road networks, using technology much more smartly to tax but also to spend, making spending transparent. I mean these are all going to be really critical.
On climate change, you’ve got the big COP26 conference coming up at the end of 2021. Talking of inflection points, people say this is the final chance to attack global warming. Where does the IMF come into that? Because you have a position on it, you’re trying to stop it. How is it going to influence the way you relate to your member countries?
I think what 2020 has done is to concentrate minds on the reality that events that we think are far away have a nasty way of coming to bite you. We’ve always heard about pandemics, their potential to be disruptive to our lives. Look where we are now. Climate change strikes us as the other big thing that we cannot afford to ignore.
In terms of what we’ve been doing as an institution we’ve been a source of a lot of the push on carbon taxation, on the climate mitigation front, we’ve been advocating for making sure that you have the right type of carbon tax framework to help decarbonise the global economy and incentivising that.
So far our focus has been on those countries that are already feeling the brunt of natural disasters, thinking about how to do climate adaptation in places like Seychelles and Caribbean countries.
But we’re going to be stepping into really high gear on the climate adaptation issue. How is climate affecting a country like Chad? Can we not link what’s been happening in the Lake Chad basin and Boko Haram strengthening over the last 8-10 years without touching on the massive changes in the region as a result of climate change?
Trying to see ways in which we can work with governments to support them think through and put programmes in place is going to be really big chunk of our agenda going forward.
Kristalina has been talking about this time and again about resilience has to be an important element of our thinking, making countries, people resilient. Of the things that we going to be focusing on are addressing inequality, climate change, those two are fundamental.
In 2008-2009, the G20 led a coordinated response to the financial crisis. With the pandemic in 2020, that wasn’t the case. But the IMF is regarded by many as having stepped into the breach. But the private sector at the moment is very reluctant to get into coordinated debt negotiations. What scope is for a much more joined-up approach on debt in 2021, bringing in the UN system, the G20, the Paris Club and also beyond that, the commercial creditors?
Even before the crisis, we had some debt pressures building up in quite a few countries, as a result of what we discussed earlier.
Governments were doing quite a lot of investment in infrastructure, in human capital, but doing it by financing too much of the investment by borrowing and not enough by taxes. So this crisis has come in and hit balance sheets severely, affecting revenue going forward. A number of countries are going to need debt workouts.
The immediate emergency really has been about creating fiscal space so countries can protect livelihoods and providing financing for that, or some debt relief under the DSSI. And then beginning the work of trying to look at what the growth and revenue pictures will be like going forward, to do our comprehensive debt sustainability assessment.
If we had taken decisions that were drastic back in June, we’d have seen countries like Côte d’Ivoire have zero chance of going back to market strength?
So we needed to step back and just give time to do an assessment in a very clear way. These things are complicated enough without without doing it in the fog of war.
So now we have more data points and now we can do these debt sustainability analyses. But it’s important to get in mind the solution to the debt problems of the 2000s cannot just be brought back and applied now because we have very different and more complex debt environments.
Before you’ll remember all of the debts that countries had were either to official bilateral creditors, Paris Club or multilateral entities, development banks, et cetera.
We are now in a situation where countries have very complex creditor landscapes, bondholders, exposure to bondholders, to syndicated banks, to new creditors like China, India, some multilateral debts.
So we need new ways of thinking about new structures for dealing with that. The key starting point for us is each individual country level doing an assessment whether debt is sustainable or not.
So we will continue to do that. And then when a country you find has solvency problem, and it’s clear that debt is unsustainable, then to apply a framework that makes sense.
I think the recent G20 initiative, this so-called common framework is a very important milestone, because it allows at least bilateral official creditors to move in tandem, before you had Paris Club perspective, then China had a different approach, Saudi or the United Arab Emirates, if they were owed money had a different approach.
Now you’re having a way that G20 official bilateral creditors agreeing on how organisations may be treated. With the private sector you will have a different approach.
Then there will be many other countries where debt is not an issue. So hopefully the likes of Côte d’Ivoire, Senegal, Kenya will continue to rely on market access and address the development challenges by continuing to finance themselves from the markets, so it will not be an issue.
But we’re going to be dealing with things in a more a country-by-country way than the uniform way we did a decade ago or two decades ago.
There was a proposal in 2020 to establish a type of ‘Brady Bond’ initiative for African debt, collateralising some of it into tradable bonds. Do you think that is that something that could fly?
There’s going to be work that needs to be done about how the massive financing needs of the region will be addressed. What role for the official sector? What are the roles that debt re-profiling and restructuring can play. But the issue is if you have a country whose debt situation is fine, do you want to treat it in the same way that you would a country where the debt is completely unsustainable? One thing that I get worked up about is kind of seeing Africa only through a debt prism.
There are an incredible range of things that are going on in the middle of this pandemic, the robustness that we’ve seen in institutions and in the role of technology, et cetera. And there’s similarly heterogeneity in the financing of the debt space also. So not treating all of the countries with the same approach but rather paying heed to countries as separate entities will be important.
Source: The African Report