When it comes to advice on prudence, nobody does it quite like the International Monetary Fund (IMF).
Last week, the Fund issued a timely report on the Impact of the Global Financial Crisis on Sub-Saharan Africa. It’s a grim read that ends with a dose of cautionary advice for governments in the region: “Policy makers must walk a tightrope between not aggravating the shock in aggregate demand on the one hand, while protecting hard-won gains in economic fundamentals on the other.” In an interview with the Financial Times, Antoinette Sayeh, the IMF’s Director for Africa, followed up the point. She was reported as saying: “We want African countries to take responsibility for adjusting their fiscal and monetary policies to the shock.”
Let me run that by you again. The Fund’s 2009 growth projections for sub-Saharan Africa have been halved, to just over 3 per cent (or zero in per capita terms). Further downward revisions are in the pipeline. Commodity exporters are facing a dramatic deterioration in their terms of trade. Remittances are in decline. Fiscal balances are deteriorating, as the revenue effects of reduced export prices, slower growth, and lower household incomes register in national budget accounts. For the region as a whole, the fiscal balance is projected to move from a 2 per cent surplus last year to a 4 per cent deficit (a shift of around $60bn in national budgets). The deteriorating revenue position of governments has clear implications for public spending. “If countries try to keep expenditure at budgeted levels,” as the Fund puts it, “the fiscal balance will deteriorate.” Put differently: find a way of cutting expenditure. In a separate document, IMF staff have developed a similarly bleak prognosis on the financing needs of low-income countries as a group. This report suggests that there is a need for a $25bn increase in concessional flows to low-income countries, rising to $140bn in a ‘bad case’ scenario. The former figure is viewed by many as an implausible under-estimate and the ‘bad case’ scenario as where we are now.
Perhaps I’ve missed something. How are African governments supposed to avoid “aggravating the shock in aggregate demand” while protecting the poor? Answers please to: ‘The IMF, Africa Department, 19th St. N.W, Washington DC.’
To be fair to the IMF, it is at least highlighting the threat to regional poverty reduction efforts. Unlike their rich country counterparts, who are spending billions on fiscal stimulus packages, African governments face acute financing constraints. The only source of fiscal support on the scale required is increased aid. But don’t get your hopes up. As the Fund’s Africa Department puts it: “With many countries facing binding fiscal constraints, and the outlook for significantly increased bilateral aid flows unlikely, many countries will need to rationalize spending and increase its [sic.] efficiency to create fiscal space for protecting social and MDG-related spending.”
As Fund Staff surely recognise, this is implausible. In the absence of a rapid scale-up in donor support, MDG-related spending will be subject to deep retrenchment. Doubtless some efficiency gains can be uncovered and some spending can be rationalised. But maintaining essential budgets in the face of a fiscal adjustment of 6 per cent of GDP and a financing gap of up to $140bn? I don’t think so. Appeals from the IMF for prudence, like appeals from UN agencies and non-government organisations for priority social sector budgets to be spared painful budget cuts, are a profound irrelevance. In effect, African governments are being asked to reorder the MDG deckchairs while public finances sink.
Since we’re on the MDGs, let’s be clear about what’s at stake. Sub-Saharan Africa has 391 million people living on less than $1.25 a day. Poverty is both broader and deeper than in any other region – and much of the hit from reduced growth will be absorbed below the poverty line. Current growth projections suggest that that the incomes of the extreme poor will now be roughly 20 per cent lower at the end of 2009 than they would have been without the downturn. With growth dipping below per capita levels, the region’s fragile reductions in poverty incidence – the first in some 25 years – will be brought to a halt. This is not a conducive environment for halving extreme poverty by 2015 as envisaged under the MDGs.
In education, sub-Saharan Africa has made extraordinary progress since 2000. By international standards, this has been an MDG success story. The out-of-school population has fallen by 10 million. Enrolment rates are increasing at six times the average level of the 1990s. Countries as diverse as Ethiopia, Tanzania, Burkina Faso and Mali have made extraordinary progress. But as household poverty rises there is a real danger that children will be pulled out of schools. And as budgets ‘adjust’ to the crisis, spending on the recruitment of teachers and building of schools will suffer. Here too, prospects for achieving universal primary education by 2015 – already poor – will deteriorate. (See The Millennium Development Goals – Bankable Pledge or Sub-Prime Asset?)
The MDG health targets face even more imminent threats. Many countries in the region face the lethal prospect of slower growth and high food price inflations – a recipe for rising malnutrition. As I mentioned in my last blog, the World Bank’s Chief Economist for Africa has done some back-of-the-envelope projections for the impact of slower growth in infant deaths. He puts the ‘mortality effect’ at around 700,000 additional deaths per annum. In a context where most low-income countries are hopelessly off-track for achieving the two-thirds reduction in child mortality set under the MDGs, the consequences do not have to be spelt out. In rich countries, people are losing their jobs, their homes and their security. Africa has more at stake, including the lives and the educational opportunities of millions of children. When their economies recover, people in the developed world can rebuild their lives. But there is no early recovery path from deepening poverty, rising malnutrition and a lost education.
In the bad old days the IMF would have seen fiscal retrenchment as a harsh but necessary cure for government profligacy. Adjustment without a human face was the name of the game. These days, the language is very different. The authors of the report on Africa will doubtless say that they are just telling it like it is: you can’t give a fiscal stimulus when you don’t have fiscal capacity. And it has to be said that the Fund’s Managing Director, Dominique Strauss Kahn, has called on aid donors to do more. So has Antoinette Sayeh – and in more forthright terms. Both of them have cautioned against aid cuts. But surely this misses the point. What the IMF should be doing is not leading a polite diplomatic rearguard action against reductions in development assistance. It should be calling on rich countries to finance the adjustment and to put their money where their commitment to the Millennium Development Goals is supposed to be. After all, as Tanzania’s President Jakaya Kikwete put it earlier this week: “If an African country was responsible for the current financial crisis the IMF would have jumped on us without invitation, with conditionality, roadmaps and benchmarks.”
Several commentators have spelt out the type of response that is needed. Nancy Birdsall at the Centre for Global Development has set out a powerful case for a global recovery package directed towards low-income aid dependent countries. Here at the Global Economic Governance Programme, Ngaire Woods has argued for an increase in IMF Special Drawing Rights (SDRs) – a form of ‘quantative easing’ on a global scale – with preferences for developing countries. The preferences are critical because poor SDR distribution is linked to country voting rights in the IMF – and the poorest countries have minimal rights. On current rules, sub-Saharan Africa would get less than 3 per cent of any SDR issue. The Fund could also do more by expanding disbursements under its Exogenous Shocks Facility to help countries get through balance of payments shocks. (Duncan Green provides a nice overview of these various proposals on his Oxfam blog From Poverty to Power.) The bottom line is that the IMF should be leading calls for the poorest countries to get access to financial support with minimal conditionality.
It is not just the IMF that has been found wanting. The World Bank’s President Robert Zoellick has been calling for rich countries to create a Vulnerability Fund that would channel 0.7% of their fiscal stimulus packages to developing countries. That’s a sensible idea – but the Bank has not mounted a credible advocacy effort to build support for it. Meanwhile, the Bank’s crisis response effort for low-income countries to date amounts to a commitment to front-load $2bn in support from International Development Assistance (IDA) – only two loans have been sanctioned so far.
The record of bilateral donors is even less impressive. Even before the economic crisis struck, there were worrying signs that that the pledges made at the Gleneagles summit in 2005 were being broken. At the end of 2008 there was a gap of around $13bn between the pledges and allocations made for Africa alone. Aid flows to the region will have to rise by 17 per cent each year for the next three years if the aid commitment is to be honoured. In fact there are worrying signs that many donors are planning cuts in aid.
The shortest part of the IMF report on Africa is the last, entitled ‘How can the international community and the IMF help?’ The answer, if you read between the lines, is ‘not much’. Aid donors get a gentle little nudge (“aid would be particularly useful now…”). The report also calls on rich countries to work towards “the successful conclusion of the Doha Round” of trade talks: there’s nothing quite like flogging a dead horse when you’re stuck for a good idea. Finally, we are told that “the IMF is playing its part” in working to protect the region’s poor.
I’m sorry, but it’s not – and this is not good enough. The IMF should be estimating the impacts of the economic crisis on Africa and calling on rich countries to finance the adjustment. In good times or bad, there is one commodity which Africa always enjoys in abundance: namely, advice on fiscal responsibility. The real scarcity today is the flow of finance needed to prevent the economic downturn from turning into a human development reversal.