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September 14, 2022

Introspection: Resetting our perspectives on the multilateral lending agencies

Sajjad Zohir |

The Business Standard |
09 September, 2022 |

Should a lender be termed a donor? Additionally, in a global economy infested by dubious transactions, the prevalence of interlinked financial contracts and power pervading economic decisions, a strategist ought to be able to justify why borrowing, instead of expenditure-saving options, should be pursued


Recently I heard a presentation from an old acquaintance of mine in the profession. I was surprised to hear him mention ‘donor’ while referring to multilateral agencies such as the World Bank and the IMF. I recall my days in graduate school when we were critical of various aspects of ‘foreign aid’ and were rhetoric about ‘aid dependence’ – and yet, we termed international lending as ‘aid.’

With that, throughout the 1980s, we addressed those lending agencies as ‘donors.’ Into the 1990s and beyond, I thought, we changed that to ‘external development partners’ (EDP), recognising the roles they were expected to play in promoting development in the developing world. This continued for a decade or two into the present century; and I recall development agencies (both Bretton Wood institutions and UN agencies) engaging consultants to prepare reports and having relevant government agencies ‘own’ those as partners.

I had presumed that the profession of economists would by and large abandon the term ‘donor’ to depict an international lending programme. Unfortunately, if anything, there may have been a reversal in the trend towards liberating the mind.

I did a quick check on the writings of several economists working on Bangladesh, most of whom work out of Bangladesh as well. I found myself guilty on one occasion – in an EPW paper on NGO (2004), I referred to “assistance from foreign donor agencies.”

There were 15 other university teachers and researchers in the country whose writings were randomly checked after a google search with their names and the word ‘donor’. Of the various articles and reports against each individual’s name and published since 2010, one was randomly picked to find if the WB/IMF was identified as a donor.

Other than two outliers (out of 15) with medium recognition in the profession, all were found to use ‘donor’ while referring to the lending agencies. Ironically, I was surprised to find no significant difference across the ‘left’ and the ‘right’ in the perceived ideological space. In a single article or report, such mentions ranged from 2-14.

I understand that there are donations (by donors) not tied to any loan; and there are loans that may or may not be tied to equity. But the so-called ‘foreign aid’ is inherently a loan with a tiny amount of ‘grant’ (not exceeding 6%) tied to it as well as to conditionalities. Surely, providers of such funds cannot be termed ‘donors.’

Many in the group (of economists) may consider themselves as ‘neutral’ third-party analysts or position themselves with the recipient of the loans. In either case, the mindset that inadvertently leads one to term a lender ‘donor’ is likely to make the person less objective in the choice of an analytical framework. Arguably, they would have to consider both the borrowers and the lenders as strategic players, particularly if they recommend actions to borrowers. [An interesting case of passive or incapacitated borrowers is marginally touched on at the end of this paper.]

Of course, there are others who may be conditioned or willing to assess from the perspective of a lender, referring to the latter as ‘donor’.

In such instances, I read the claim of being a donor as an effective instrument to (psychologically) weaken the borrowers in a loan bargain. We do observe such psychological games in many spheres of pre-contract price bargains.

The rest of this analysis is addressed to the first two groups of analysts and strategists. Henceforth, I term a multilateral lending agency as a lender and propose a narrative to comprehend the purposes of their engagements.

A sector-specific multilateral agency with a mandate is compatible with the presence of global governance

It is fair to assume that the supra-national entities (such as the multilateral development and lending agencies) came to exist due to either the presence of a ‘global’ government or as a part of initiatives to ‘govern globally.’ I refer to such an invisible government or the initiative as the Agency.

The Agency’s existence as a coordinator (and enforcer) found rationale in the quiet acceptance of the norm that people of all origins will never be able (or allowed) to move freely, thus, the world population will largely remain segmented territorially.

Be it subservient to a dominant power or be it ‘democratic’ representing all countries; such an Agency is expected to have a mandate that may be further operationalised through various specialised (sub-)agencies. One such sub-agency may be assigned to oversee global macroeconomic and financial stability, with the primary purpose of ensuring the stability of the international monetary system—the system of exchange rates, international payments, and, if I may suggest, the stability of the currency that dominates international payments.

These match with the statements one finds on the IMF website, where the last item appears to be hidden under the concern for price stability. There are numerical macro/global models (such as the multi-country GTAP model) that allow organisations, country-level planners, and the Agency to derive an internally consistent (and compatible) series of targets.

Of several activities that the Agency is expected to engage in, one is to allocate the global surplus in one year to different activities and countries (in the following year) in order to maintain a growth path, avoid recessions arising from shortfalls in effective demand, as well as (possibly in association with the World Bank) to maintain some degree of harmony (equity) across countries/territories. [One may note that the last has remained largely unfulfilled.]

In pursuit of the above, IMF representatives are found to engage closely with the central bank of individual countries, and alignments are generally sought, among other things, in inflation targets, growth in money supply, exchange rate and foreign exchange reserve.

A country’s monetary policy (statement) covers all these, including the instruments and period-specific targets. The proponents generally advise national governments to confine the focus of monetary policies to financial stability that should remain immune from fiscal concerns. Such verticality in programme design appears to be a common feature in all spheres of governance under the Agency; and often, it overwrites all attempts for horizontal coordination (among different sectors) inside a country. The presence of the latter practice is perceived as a sign of sovereignty asserted by individual countries, irrespective of their status on the development scale.

An example is the NITI Aayog in India, which again has several verticals that may overwrite self-governance by sub-national entities. The IMF policy body, on paper, appears to avoid engaging in discussing the (possible) tension between verticals rooted in the Agency and the initiatives to build horizontal coordination at the national level.

A monetary policy document of 28 August 2015 recognises non-standard issues that deserve attention to address financial stability—yet packages the latter under the heading of ‘financial risk.’

The said IMF document notes that “the door should remain open as our (IMF’s) knowledge of the relationship between monetary policy and financial risks evolves and circumstances change.” One may read this to suggest that the space for negotiating with the IMF exists.

With segmentation arising from non-mobility or regulated mobility of labour across borders, the IMF is able to discriminate in the financial market. Moreover, contracts in financial markets are often tied to contracts in asset/resource, product and/or labour markets.

Thus, sanctions in one or the other markets are intrinsically linked to discriminatory practices in the financial market.

Within that broad perspective, I propose to view IMF-imposed conditionality as an attempt to align a sub-system with the IMF-perceived global system. A more rigorous and critical review of the analytical framework and numerical model that the IMF uses to design country-level programmes is needed to assess how ‘democratic’ or ‘autocratic’ the Agency is.

I would hope that economists with first-hand experience with the tools and the system will take up the assignment to assist national governments in defining strategic positions.

Why would a developing country ‘deviate’?

Probable reasons why a potential borrower may find discomfort with a grand design pursued by the IMF, along with my observations, are mentioned below.

First, growth and/or employment generation have crept into the mandate of monetary policy. Increasingly, pragmatic policymakers in developing countries recognise the importance of money and finance in expanding the real sector economy. Thus, an emerging country is likely to deviate from maintaining the status quo and may find the rationale in moving out of the band on parameter values set by the IMF on monetary targets.

Not all ‘deviations’ may, however, be rooted in growth drives. The power structure within a country may breed rent-seeking behaviour that leads to the breakdown of desired norms. Since procurements associated with growth also drive fuel rent-seeking, diagnostics on ‘deviations’ need careful analyses.

A second reason is rooted in the apprehension that the conditionalities tied to IMF lending are meant to serve the interests of the countries commonly identified as the North. With a handful of countries of the North and a few allies accounting for more than 50% of votes and having the United States leading the group with more than 16% of the voting right, such apprehension may be justified.

The apprehensions find firmer ground in areas of conditionalities where strategic interests get blended with the ‘reform’ agenda.

If the Agency chooses to promote one or a cluster of countries, tampering with relative prices would be an additional instrument. It has been used to transfer resources, say, from one sector to another, from one social group to another, rural to urban (or vice versa). The same logic applies to the foreign exchange market, where exchange rates are essentially the relative price of two currencies.

With the centrality of the US dollar and skewed power distribution within IMF favouring sustenance of the dollar power, policymakers in developing countries are likely to be sceptical about the intent of policy prescriptions on the exchange rate and foreign exchange reserve. They may find foreign exchange rates and reserves as instruments to pursue their own agenda of investment and growth.

Selected observations on Bangladesh’s IMF Loan

Brief observations are made below on a few un-spelt aspects of the IMF loan and Bangladesh’s ‘non-strategic’ responses observed in the public domain.

The Bangladesh government’s expression of interests came in different packages—voiced by multiple agencies, ranging from the Foreign Ministry, Finance Ministry, Planning Ministry, and the Bangladesh Bank. There was a No, a Yes and a pretentious mention of the tactical stand.

But the manoeuvring, along with the last move on a shocking rise in domestic fuel prices, were sufficient to cloud (overshadow) the reasons. All these reveal either a well-coordinated camouflaging game or a pathetic lack of coordination among actors with conflicting purposes. Unless there is an alien third-party coordinating the (apparently) random acts, responses so far suggest the absence of a strategist.

Additionally, a visible segment of the ‘civil society,’ including analysts, raised hues and cries by comparing Bangladesh’s future with the dire situation Sri Lanka had been facing. All these put additional pressure on a government to borrow, strengthening the lender’s position. All lending agencies want their clients to borrow rather than advising them to save by spending (especially importing) less. Thus, outright justification of (IMF) loans in terms of ‘desperateness’ and non-critical endorsement of the loan conditions would be signs of poverty in our intellects.

Elsewhere (TBS, 26 August 2022), I have argued that regimes influenced by ‘Dual Citizens’ have an inherent tendency to seek external borrowing that increases the supply of foreign currency and subsequently facilitates capital flight. Such un-surfaced pressure from ‘within’ may drive the process of seeking a loan agreement in the guise of ‘a better credit rating of the country.

The above suggests that what are perceived to be internal demands may not be rooted in internal interests. This may also surface in interlinked contracts, implicit or explicit, that are not necessarily confined to the conditionalities on the reform agenda.

For example, a borrowing that frees constraints on import payments to a specific country is effectively meant to benefit that country (third party). Similarly, goods imported with LCs opened by using Bangladesh’s foreign exchange reserve may find their destination in a third country. [I had previously wondered why the Bangladesh Bank wanted the banks to track the movement of vessels carrying cargo under LCs opened with them!]

I sincerely hope that the ‘macroeconomists’ critically examine the purposes of macro management and macro stability and assess deviations (if any) that were good (or bad) to the country.

In a global economy infested by dubious transactions, the prevalence of interlinked financial contracts and politics and power pervading economic decisions, a strategist ought to be transparent and be able to justify why borrowing, instead of expenditure-saving options, should be pursued.


Dr Sajjad Zohir is the Executive Director of Economic Research Group (ERG).


Source: https://www.tbsnews.net/analysis/introspection-resetting-our-perspectives-multilateral-lending-agencies-493122