Friday, April 27, 2012

IMF in Africa

The International Monetary Fund has loaned billions of dollars to African countries yet most Africans remain in poverty.  These IMF loans have come with conditions attached requiring borrower nations to reform their economy in specific ways in order to receive the full loan amounts.  The conditions are a source of controversy as some charge that the IMF is interfering in the sovereignty of borrower nations but also often result in higher prices as the government restructures policies.  Higher prices often lead to popular unrest, demonstrations, and sometimes riots as the people struggle to pay higher prices with no changes to income or visible benefit from the IMF required changes.  For example, Nigeria eliminated a fuel subsidy in January 2012 following recommendations from the IMF and Nigerians protested violently as prices on fuel, food, and many other products doubled or more.  Under popular pressure Nigeria partially restored fuel subsidies but prices remain high on essential commodities.  Ghana, Cameroon, and Gabon have also begun to cut fuel subsidies under pressure from the IMF.  

The International Monetary Fund (IMF) was created on 22 July 1944, along with the International Bank for Reconstruction and Development (now known as the World Bank), as part of the Bretton Woods Agreements in New Hampshire, USA.  44 countries signed the agreements including African colonial powers France, Belgium, and the United Kingdom, but also South Africa.  The original role of the IMF was to monitor and maintain exchange rates between western industrial nations but over the years the role of the IMF has evolved (Vreeland 2007, p. 5).  The IMF’s focus in now stabilizing balance of payments whereas the World Bank focuses on programs to promote long-term development.  Both the IMF and World Bank have worked together in Africa and elsewhere in order to develop programs to assist developing countries (Stein 1992, p. 83).
Currently, the IMF has 188 member countries and functions as a specialized agency of the United Nations (UN) with its own charter and rules of governance.  Each member country contributes funds to the IMF which is the basis for the number of votes each country has in the decision making process.  Industrialized or wealthy countries that contribute more to the fund have a greater say in IMF decisions and the US maintains the largest share of votes (IMF 2012, Membership). 
Most African nations became independent in the 1960s and were shortly thereafter incorporated into the IMF.  For example, Nigeria joined the IMF on 30 March 1961, seven months after becoming independent on 1 October 1960 (Department of State, 2012). In total, African voting share in the IMF is not very significant, adding up to only 119,995 votes or 4.77% of the total 2,512,807 votes in the IMF.  The US by itself has 421,961 votes or 16.75% of the voting share of the IMF (IMF 2012, IMF Executive Directors and Voting Power).  All 53 African countries are members of the IMF, including newly independent South Sudan, since July 2011, who was admitted to the IMF on 18 April 2012 (IMF 2012, Press Release 12/140). 

Evolution of the IMF
Loans. The original loans or financial lending from the IMF came with no conditions attached, as the role of the IMF was to assist with exchange rates. In the 1970s the IMF began to loan to poor countries by concessional financing through the Trust Fund (IMF, 2004). However, during the administration of United States President Reagan the US began to push the IMF to attach conditions to IMF loans.  The primary conditions imposed by the IMF were to reduce trade and investment regulations, cut public expenditures, and push exports in order to improve the investment climate, reduce government deficits and enhance foreign exchange earnings (Neu, Rahaman, Everett, & Akindayomi, p. 405).
The new IMF loans created in 1986 were known as Structural Adjustment Facility programs (SAF) and were lent at subsidized interest rates (0.5% interest rate) to poor countries.  In 1993 the SAF was enlarged and extended, thus becoming the Enhanced Structural Adjustment Facility (ESAF) programs.  In total, more than 80 countries were eligible for assistance under ESAF.  Eligibility for SAF/ESAF loans was based primarily on the country’s per capita income, and during the lifespan of the ESAF $10.1 billion was lent to eligible countries. In 1999, the ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF) in order to focus more on the recipient country’s economic policy formation and focus more on poverty reduction and economic growth.  The PRGF program was also designed for greater involvement by the borrowing country in forming the goals and the involvement of civil society in order to achieve the country’s objectives   (IMF, 2004). 
Conditionality. Conditions are still attached to IMF loans but they are negotiated between the country and the IMF and should therefore reflect the political agenda of the recipient country (Dreher, 2006).  Common conditions are: removal of government subsidies and price controls, significant devaluation of the local currency, cuts in public sector expenditures, privatization of government owned or controlled businesses, relaxation of foreign exchange controls, increases to interest rates, withdrawal of protectionist measures, the introduction of user fees, tight control of credit, and increases in the prices of agricultural products (Stein, p. 83).  Repayment of loans is always a necessary condition.  Adherence to these conditions can come with risk to the stability of the government if they had been manipulated by the government to gain favor or stay in power.  For example, the government may have subsidized fuel prices to keep the cost to consumers low in order to gain political favor.  Removing the subsidy could cause the leaders to lose support, especially if the opposition promises to reinstate the subsidy.  A current example in Senegal is where newly elected President Macky Sall, elected in March 2012, reduced prices on rice, sugar, and oil in order to consolidate his political gains (Dore, 2012).  Senegal had been advised by the IMF to not attempt price controls on food or subsidies (IMF 2011, p. 11) and prices had climbed, resulting in protests (Ba, 2008). 
Donor Interference.  The primary donors to the IMF are the United States, France, and the United Kingdom among others.  As major donors the US and two other former colonial powers use the IMF to accomplish their national agendas and have intervened on behalf of their African partners at the IMF (Stone, p. 587).  Program interruptions are automatic (suspension of disbursement of funds) when targets are missed, but major patrons have influenced the duration of the punishment duration.  Members of the CFA French common currency zone in Africa, mainly composed of former French colonies that use a common currency, have recorded punishment intervals 17 months shorter than non-CFA African countries.  African members of the British Commonwealth generally have punishment periods 12 months shorter than non-members.  The US has also intervened on behalf of countries it regards as most important or compliant with US objectives.  US objectives in Africa are generally related to economic policy and democracy promotion, but also terrorism or security related.  These US allies also the largest recipients of US foreign aid.  African countries with strong ties to donors experienced a type of moral hazard where they had more frequent program interruptions, were undeterred by short punishments, and were “free to flaunt the IMF’s conditions” (Stone, p. 590).

IMF in Africa
In the early years of the IMF the fund did not lend much to Africa as most of the continent was controlled by European colonial powers.  Even post-independence most African countries were not major borrowers from the fund, however business soon picked up and IMF loans to Africa tripled from 1975 to 1982, accounting for 28.6% of IMF loans (Boughton, p. 678).  46 African states borrowed from the fund in the 1980s, averaging $1.5 billion in loans per annum.  In the 1990s, 41 African nations borrowed an average of $1.3 billion per year from the IMF (Boughton, p. 682). 
Part of the reason for increased IMF activity in Africa starting in the 1980s was the selection of Michel Camdessus from France as the IMF Managing Director and Chairman in 1987.  Camdessus led the IMF until his retirement in 2000 and was committed to keeping Africa on the Fund’s active agenda and personally visited 30 African nations during his tenure.  Under Camdessus, Africa received more technical assistance than any other region (Boughton, p. 683). 
African Regional Technical Assistance Centers (AFRITAC).  In order to assist the African nations with economic policies and planning the IMF established four regional technical assistance centers on the continent starting in 2002.  East AFRITAC was established in Tanzania (2002), West AFRITAC in Mali (2003), Central AFRITAC in Gabon (2007), and South AFRITAC in Mauritius (2011) whereas the IMF has only five other Regional Training Assistance Centers scattered throughout the world (IMF 2012, IMF Regional Technical Assistance Centers).  The office of the managing director has also kept Africa as a priority despite the recent concerns over the global economic crisis and Eurozone crisis.  Shortly after taking office as the IMF Managing Director Christine Lagarde went on an African tour to visit Niger, Nigeria, and South Africa to talk priorities and economic assistance programs.  During the course of her tour the IMF announced a fifth technical assistance site to be located in West Africa to assist non-francophone countries (Lagarde, 2011).  

African Exceptions
Not all African nations were in a hurry to borrow money from the IMF.  Some African nations were suspicious of conditions attached to IMF loans and were hesitant to accept conditions that obligated the country to follow IMF guidance.  Three notable African nations stood out in their resistance to IMF loans: Nigeria, post-apartheid South Africa, and Angola.
Nigeria.  Nigeria is the largest non-borrower African member of the IMF and was a major creditor from 1973 until 1982 when the price of oil dropped, negatively affecting the Nigerian oil-based economy (Boughton, p. 686).  President/Major General Ibrahim Babangida entered into negotiations with the IMF for a loan but suspended talks in September 1985 after threats of a general strike by the Nigerian Labour Congress if Nigeria accepted an IMF loan (Van de Walle, p. 491).  Babangida submitted the question of an IMF loan to the people who overwhelmingly rejected the IMF loan and its attached conditions.  Western debtors and the IMF wanted Nigeria to devalue the Naira by 30%, terminate domestic subsidies of petroleum products, reduce state expenditures, sell off state enterprises, and liberalize trade restrictions.  Given the opposition to the IMF, the Babangida government developed its own financial restructuring program that included many of the key IMF components, but was more acceptable to the people and satisfied the IMF and Nigeria’s lenders.  Also, instead of using the unpopular IMF to monitor the program, Nigeria turned to the World Bank to monitor compliance.  This allowed Nigeria to reschedule its debts and qualify for a $3 billion IMF loan, which Nigeria never used (Ojo & Koehn, p. 9).  The government of Nigeria withdrew subsidies for the domestic sale of petroleum, dismissed some public servants and trimmed the salaries of many it retrained, imposed a new levy on imports, and allowed the devaluation of the Naira.  Government actions such as removing the petroleum subsidy, which almost doubled the price of fuel at the gas stations, caused hardship for Nigerians who accepted the hardships and Nigerian program as a better and less painful program and than the program offered by the IMF (Ojo & Koehn, p. 22).  Nigeria also arranged loans with the IMF in 1989, 1991, and 2000 but did not draw any money from the available funds and allowed the financial arrangements to lapse without implementation (IMF 2012, Nigeria: Financial Position in the Fund). 
South Africa.  As one of the original signatories of the Bretton Woods Agreements, South Africa began as a creditor country due to its gold production and exports.  However, due to increasing isolation in the 1970s due to international objection to apartheid and domestic disturbances South Africa arranged for Standby Agreements with the IMF.  South Africa drew funds in 1976-77 and again in 1982-83 before it was cut off from the IMF by anti-apartheid international sanctions (Boughton, p. 691).  As the apartheid government of South Africa began to make movements to move towards a system of majority rule in the early 1990s, it also began to negotiate another loan from the IMF.  The UN lifted sanctions against South Africa in 1993 after South Africa began to prepare for national elections and the IMF Executive Board approved a loan of $850 million to the apartheid government ran by President de Klerk on 22 December 1993 (Boughton, p. 694).  The following year Nelson Mandela was elected President of South Africa and the formerly outlawed African National Congress (ANC) took over the government.  The IMF continued to approach Mandela to take out additional IMF loans but was rejected by the ANC due to the IMFs former support to the apartheid government.  The new government of South Africa was also concerned that IMF loan conditions would restrain their ability to make economic policies and thought IMF conditionality threatened the sovereignty of South Africa (Boughton, p. 695).  In June 1996 South Africa launched its own Growth, Employment, and Redistribution policy (GEAR) to improve fiscal policy, stabilize the exchange rate, and liberalize the economy in order to promote investment and employment opportunities.  The IMF prepared an assistance program to build on GEAR by requiring further monetary tightening and deeper structural reforms and was initially accepted by Mandela but in the end was vetoed by the ANC (Broughton, p. 698).  The last loan by the de Klerk government was paid back by South Africa in 1999 and South Africa has drawn no funds from the IMF since the end of apartheid in 1994 (IMF 2012, South Africa: Transactions with the Fund). 
Angola.  The former Portuguese colonies of Angola, Mozambique, and Guinea-Bissau were late joining the IMF as they did not win achieve their independence until 1975.  Mozambique however joined the IMF nine years later in 1984 and Angola fourteen years later in 1989 due to their allegiance to the Soviet Union and Cold War politics (Vreeland 2005, p. 13).  Guinea-Bissau joined the fund in 1977 and has drawn consistently from the Fund (IMF 2012, Guinea-Bissau).  Until recently Angola refused financial programs from the IMF in part due to its mineral wealth but also due to lingering effects of the Cold War in Africa where the US and South Africa supported rebel groups that fought against the government of Angola.  However, in May 2000 relations between Angola and the IMF began to thaw when Angola consented to an IMF staff-monitored program (Boughton, p. 687).  2009 saw the first IMF disbursement of funds to Angola, continued to disburse funds in 2010, 2011, and 2012 (IMF 2012, Angola).  In total, Angola drew $1.33 billion from the IMF under a Stand-By Arrangement as part of program to restore macroeconomic stability.  Under this program, Angola underwent a “fiscal adjustment, settled large domestic arrears, rebuilt foreign arrears, rebuilt foreign reserves, stabilized the exchange rate, and reduced inflation.”  The IMF program also worked with the government to improve transparency in oil revenues, accountability in the state oil company, and increase public investment (IMF 2012, Press Release 12/109). 
Others.  Eritrea became independent from Ethiopia in 1993 and joined the IMF in 1994 and has not drawn any funds from the IMF (Broughton, p. 687). 

“Developed” African Countries
Several African nations are considered well enough developed by the IMF to be considered ineligible for concessional loans although a great part of their populations still live in poverty.  Botswana and Libya are creditors to the IMF and have never taken any loans from the IMF.  Namibia has also never taken an IMF loan but has undertaken consultations with the IMF (Broughton, p. 688).  Mauritius took IMF loans in the 1980s but repaid them by 1991 and has not since received another loan from the IMF (IMF 2012, Mauritius).  The Kingdom of Swaziland also previously took loans from the IMF but paid them off by 1986 and has not drawn any other funds since from the IMF (IMF 2012, Swaziland).  Seychelles was considered a “good” African country with the IMF but since the recent global economic downturn has drawn loans from the IMF annually since 2008 (IMF 2012, Seychelles).  Other “middle income” countries such as Algeria, Gabon, Morocco, South Africa, and Tunisia had borrowed occasionally in the past but most of the money in the 1990s went to four main borrowers: Algeria, Zambia, South Africa, and Côte d’Ivoire.  Together they accounted for over half of the gross lending by the IMF in Africa or $7.3 billion of the $13.2 billion borrowed in the 1990s (Broughton, p. 688).

Has the IMF Helped Africa?
Are African Countries Doing Better?  The heavily indebted countries for the most part still remain in debt.  Lending by the IMF and World Bank has not succeeded in adjusting macroeconomic policies and growth outcomes.  Evrensel found in her 2006 study of countries that participated in IMF programs that “extreme imbalances in inflation, budget deficit, current account, inflation, and real overvaluation of the exchange rate are not affected by the time spent under the structural adjustment programs and the number of programs received by the countries” (Evrensel, p. 279).  Those with mineral wealth (Angola and Nigeria for example) still encounter economic problems and need economic guidance and assistance. Some countries that were independent have turned to the IMF for assistance since the economic financial downturn that began in 2008.  Axel Dreher, in his 2006 article, argued that IMF programs are failures as the conditions do not affect economic policy and are the outcome of bargaining process between government and IMF (Dreher, p. 781).  Dreher and Walter followed up his research in 2010 and determined that IMF involvement benefits the recipient country but found that fund dispersal was not necessary to achieve a benefit for the country. The mere existence of the IMF program produced benefit.  However, the IMF advice and technical assistance program have proven effective as well as the IMF “Seal of Approval” conveyed by the approval of an IMF program that allows the country to refinance debt if necessary, arrange other financing, or make other desired changes in the name of the IMF (Dreher & Walter, p. 11).  The Nigerian case where they had arranged financing with the IMF but never drew any funds would demonstrate the effect of the IMF Seal of Approval.  Once the loans were obtained with the IMF, Nigeria was able to reschedule debts with the Paris and London Clubs, including the discounted buyback of $3.4 billion of London Club debt on the secondary market in 1991 (Lewis & Stein, p. 13).  Nigeria paid off the last of the $30 billion it owed the Paris Club of official creditors in April 2006 but was also able to write off $18 billion through negotiations with creditors (Okonjo-Iweala, 2008).
IMF as Cause of Problems. Conditions attached to IMF loans have caused controversy, protests, riots, and regime changes as the people are most affected by conditionality have expressed their discontent.  In addition, the loans have resulted in increased foreign debts and the heavy burden of servicing or paying off the debts (Ihonvbere, p. 142).  The ineffective nature of IMF programs and the ease of obtaining further IMF loans creates a moral hazard where the IMF will bail out countries that haphazardly apply economic policies (Evrensel, p. 265).
Following current IMF Director Christine Lagarde’s visit to Nigeria and several other African nations in December 2011, Nigeria cut its subsidy for petroleum products in January 2012.  The fuel subsidy cost Nigeria $8 billion in 2011 and was expected to increase again in 2012 with the increase in fuel prices globally.  In budget terms, the fuel subsidy accounted for 30% of all government expenditures, 4% of the gross domestic product, and 118% of the capital budget.  In comparison, Nigeria had only budgeted $2.2 billion for education and $2 billion for health care (Songwe & Mayo, 2012).  Fuel prices increased by 115.4% after the removal of the subsidy causing nationwide protests and general strikes.  10 Nigerian protesters were killed by federal government security troops who opened fire on the crowds of protestors (Odunlami, 2012).  The Nigerian government capitulated to restore most of the fuel subsidy after the strike shut down oil production.  Fuel prices had risen from $1.70 per gallon to $3.50 during the protest, but the Nigerian government agreed to reduce the price to $2.75 per gallon (Associated Press, 2012). 

International financial institutions like the IMF have not been effective in changing macroeconomic policies on the African continent in order to benefit the lives of the average African.  Billion of dollars have been spent in Africa but African economic growth averaged only 0.8% between 1965 and 1990 whereas the rest of the developing world averaged 1.8% during the same period (Sachs & Warner, p. 336). Research has shown that conditionalities on macroeconomic policies as conditions for loans have not made much positive effect and IMF recidivism demonstrates the required changes were insignificant.  Nigeria again serves as an example, despite never cashing an IMF loan.  In 1986 the government instituted its own policy changes along the lines of the IMF recommendations including eliminating the fuel subsidy and prices gradually began to increase on 31 March 1986 in order to minimize the effect of the price increase.  Fuel prices increased three more times before 1993 when the price was stabilized.  Nigeria again revisited fuel subsidies in 2002 by removing subsidies on crude oil and then fuel in 2003.  Fuel prices increased in 2003 from N26 to N55 per liter as a result of the subsidy removal.  The most recent fuel subsidy removal resulted in a price increase from N65 to N140.01 per liter, demonstrating that the price of fuel had stayed roughly the same since the 2003 removal of the fuel subsidy (Odunlami, 2012).  The goal of removing the government subsidy for fuel was to allow market demand to set the fuel prices, but in effect each time the subsidy removal served only to set a new higher price and indicated a lack of will to let market forces set prices on a politically valuable commodity. 
Since Nigeria and South Africa have repeatedly implemented financial reform programs similar to recommendations by the IMF without any contractual obligations it seems that African governments have accepted loans or made economic policies for their own interests.  Ankomah Buffour, Ghana’s Foreign Minister illustrated this point by saying “our position and views as a centrist government happen to coincide on many occasions with the positions and views of the IMF/World Bank…Its much more a meeting of the minds” (Odunlami, 2012).  If leaders only implement the policies that they want and actively participate to negotiate the conditions of IMF loans to get what they want it appears that the monetary contributions to these countries has only benefited the leaders politically and economically.  The failure of the implementation of these programs to lift African countries and stop the cycle of recidivism demonstrates the need to change or end the program.  However, the connection between donors and IMF program countries and their influence on punishment for lack of compliance with conditionalities suggests that the IMF monetary assistance programs serve another purpose in allowing more powerful countries to buy influence with other countries.  The IMF creditor nations also financially benefit from extending loans to African nations.  In which case each sovereign country, both those offering the loans and others accepting loans, acts in their own best interests and manipulates its assets, economic, and political systems to achieve its own best possible outcome.  Given the lack of accountability and transparency in many African nations and the virtual monopoly of national assets by the leadership of these nations, the African state in many cases is acting in the best interests of the leader and close associates.

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