Is the IMF finally cozying up to Africa?

http://observer.ug/index.php?option=com_content&view=article&id=7800:is-the-imf-finally-cozying-up-to-africa&catid=38:business&Itemid=68 Written by Devapriyo Das

Friday, 26 March 2010 07:33

The global recession is reshaping the relationship between developing countries and international financial institutions, and African economies stand to benefit. During his latest tour of Africa earlier this March, Dominique Strauss-Kahn, President of the International Monetary Fund, commended African economies for recovering rapidly from the international credit crisis. He attributed their success to long-term efforts at reducing external debt, building foreign exchange reserves and controlling inflation. “They strived to preserve—and sometimes even increase—public spending at a time when revenue was falling rapidly,” Strauss-Kahn noted appreciatively of Africa’s economies. He visited Kenya, Zambia and South Africa. SAFETY NETS Speaking at Nairobi University to a large audience that included Kenyan Prime Minister Raila Odinga and Nobel Peace Laureate Wangari Maathai, he urged African countries to consolidate economic growth for the future. He suggested they frame progressive tax policies, spend more to stimulate economic activity and raise consumer demand, while building financial reserves to cushion against shocks like natural disasters, price volatility in export commodities and climate change. “Social safety nets must be strengthened”, Strauss-Kahn declared. “This is the first line of defense for the population against adverse shocks”. He concluded that Africa’s post-crisis recovery would need to be sustained by “sufficient measures to protect social spending and pro-poor initiatives.” His words represent a remarkable turnaround in the Fund’s relationship with Africa. After all, it was responsible for imposing stern budgetary constraints on numerous African nations from the mid-1990s onwards, in an effort to curb runaway inflation and huge budget deficits. Uganda, among others, qualified for debt relief and access to development loans. However, the conditions attached involved shedding thousands of public sector jobs, opening up the economy to foreign direct investment, a liberal currency exchange regime and cutting the budget deficit. Spending on social services like health care, transport infrastructure and quality education was badly reduced as result, to the detriment of ordinary citizens. RECKLESS Now, the Fund is looking for a new role in a post-recession world. The global lender has been labeled as irrelevant and hypocritical in recent years. It is accused of bullying developing nations with oppressive loan conditionalities, even while keeping silent as rich countries spend recklessly and accumulate mountains of public debt. Indeed, the global financial crisis was sparked by US and European banks granting loans to unviable customers and investing savings in high-risk ventures that subsequently failed. The contagion then spread to financial markets and the world economy. Africa’s own growth rate fell to just 2% in 2009, down from 5%-7% per annum in recent years. Rather than preach austerity, leaders of the G-20 (the world’s twenty largest economies), agreed, at their London summit in April 2009, to infuse $750 billion into the IMF’s coffers to help it stimulate economies foundering in the recession. Since then, rich nations have had to guarantee the non-performing assets of banks with taxpayers’ money, and launch spending packages to stimulate the economy. The Fund itself committed $3.6 billion in zero-interest lending to Africa in 2009 (a threefold increase on the previous year) to aid its recovery from recession. It now expects the continent to grow by 4.5% in 2010. Certainly, the financial crisis has put the Fund back in business. But has it changed? FEWER CONDITIONS “We have moved toward less intrusive conditionality, focusing only on core policy measures that are critical for stability, growth, and poverty reduction”, Strauss-Kahn claims. These measures include support to the power and transport sectors and “a more flexible approach to debt”. Basically, it will allow countries to borrow more at concessionary rates, provided their debts are well managed and their economic policies are sound. Future instruments to underwrite systemic shocks could include national disaster insurance and a so-called Rapid Credit Line, which is meant to deliver finance quickly and with few strings attached. A Green Fund to tackle the negative effects of climate change on the continent is also being suggested. It would offer “grants or highly-concessional loans” and be funded via a blend of budgetary transfers from developed economies and revenues earned through trading carbon credits and taxing carbon emissions. That is easier said than done. Public resistance to disbursing aid and increased protectionism is characterizing the post-recession environment in many Western countries. The scenario is likely to worsen as world trade dips and the demand to protect local markets and jobs grows. At the moment, real change appears harder to achieve than imagined. But Africa is no stranger to that fact. Hits: 537