IMF faces defining challenges

Debt, Argentina and other problem children

The International Monetary Fund saturates the airwaves with flashy work on climate and re-channelling special drawing rights. But defining challenges for its future and reputation will soon descend upon it. They have to do with how the Fund manages implementation of the common framework on unsustainable low-income country debt and deals with its perennial enfant terrible – Argentina.

The common framework was launched last year to help LICs restructure unsustainable debt, providing a Paris Club-like structure for non-member, non-traditional official creditors. It is untested. But with Glencore agreeing to enter good faith debt discussions with Chad and with Zambia negotiating an IMF programme, it may soon come into play.

How the common framework does so raises major questions about the Fund’s commitment to helping LICs tackle unsustainable debt. As evidenced by Chad’s case, one question is whether a recalcitrant private sector will drag its feet at every turn, and if so, what will the Fund do? Another is whether the Fund even has a handle on debt numbers?

Non-traditional official creditors, such as China, have become major LIC lenders. Despite having signed the common framework, China is a reluctant participant. It has typically sought to extend unsustainable debts, rather than cut them. It argues that the China Development Bank extends private, not public loans. Debt data and contracts are opaque.

Any Chinese statements to provide financing assurances consistent with Fund programmes will be welcome but leave contentious details to be worked out.

The Fund can lend into official arrears under tough criteria. But countries will be wary of tangling with China. Plus, while a country could conceivably run arrears to China during a programme’s life, how will others ensure the money they put in won’t be used to repay China after the programme? Another question is whether the Fund might soften debt sustainability analyses – primary budget and growth assumptions – to fudge unsustainable debt or partake in ‘extend and pretend’ scenarios akin to European efforts on Greece.

Chad and Zambia will establish key precedents for the common framework which may impact middle income countries. The Fund must stand up to the private sector and China and back meaningful debt restructurings for LICs that eliminate unsustainable debt overhangs. Is the Fund up to the task?

The Fund’s enormous mess with Argentina is coming to a head. Argentina owes the IMF roughly $19bn in both 2022 and 2023. The solution is obvious. The Fund and Argentina should agree on a programme, allowing the two to refinance exposures coming due on an extended timeline.

Argentina has long been a land of boom and bust economic policies, resulting in hyperinflation and popular suspicion of the peso. The capital market is small due to distrust, giving the government little scope to borrow. Instead of disciplining fiscal policy and taking responsibility for itself, Argentina borrows at home and abroad, serially causing high inflation and default.

The IMF and Argentina had been expected to develop a weak programme that barely passes the smell test. But this has not yet happened. Meanwhile, conditions worsen. Inflation is over 50%. The gap between the parallel and official exchange rate is around 90%. Price and capital controls abound. The central bank finances deficits. The government seems incapable of reform and parliament is now in opposition hands. Argentina complains about IMF interest charges, but reform progress is scant.

Will Argentina start running arrears to the IMF, as a recent OMFIF panel predicted, which would be a huge black eye for Argentina and the IMF? Can the two somehow navigate a minimally credible path forward?

Beneath the radar, the Fund remains heavily involved in difficult programmes with reputational and geopolitical significance.

Ukraine’s IMF programme has long been a tool to help increase Ukraine’s market orientation and integrate it with the West, especially given heightened Russian belligerence. Through a hard slog with the last government, progress was made in strengthening central bank independence, beefing up the finance ministry and establishing fiscal discipline, and fighting corruption and oligarchs.

The Zelensky government has undermined this progress. Constant reshuffling of the cabinet has enfeebled institutions. The central bank and banking reforms have been weakened, and, while some former oligarchs may be debilitated, new power centres may emerge.

After a long hiatus, the IMF and Ukraine are bringing a tranche forward. But progress in Ukraine has gone backwards.

Pakistan – with over 20 IMF programmes in its history – is seeing its extended programme run into long delays. The government is stalling on central bank independence. Concerns abound over central bank deficit financing. Meanwhile, the country remains unwilling to tackle key challenges, including cracking down on tax avoidance especially for the well-off, and tackling energy pricing and power sector indebtedness. The effect has been to trap Pakistan in a low growth equilibrium. Pakistan’s relations with China are becoming ever closer. Can the IMF help Pakistan lift itself out of its low growth trap or will it again acquiesce to more muddling poorly through?

The IMF faces enormous and defining challenges in the coming months. Its reputation is on the line.

Mark Sobel is US Chairman of OMFIF.

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