Why IMF approach is a misbelief? Stabilization unreachable?

 

Article's background

  • I happened to read a meaningful opinion published in the Ethiopian paper "Capitol" regarding the IMF programme for Ethiopia. (Read the article here).The article is reproduced below for easy reference.

  • The design of IMF programes for all countries hit by foreign currency crises is almost same except the popular economic numbers of respective countries.

  • The reason for the same design is the IMF's peculiar approach to the macroeconomic management of countries as highlighted below.

    • The IMF believes that all economic ills under the sun and moon are because of the excessive budget deficit and debt.

    • Accordingly, inflation, high interest rates, BOP deficit, currency depreciation, low growth and business investment and debt unsustainability are all direct results of the continuing budget deficit.

  • Therefore, the IMF stabilization program has five essential elements.

    • A medium-term loan to boost the foreign currency reserve for the time being. 

    • Conditions imposed on cutting the budget deficit and debt and divesting state enterprises.

    • Tighten the monetary policy by raising interest rates and separating the inflation targeted money printing from the government.

    • Coordinate the IMF foreign currency network of World Bank Group and financial markets to infuse foreign currency investments into the countries.

    • The newest element is the debt restructuring under the supervision of international financial experts.

    • The new IMF socialist slogan is the protection of the poor and vulnerable population which country goverments have been taking care of throughout the history.

  • Therefore, the IMF approach to the macroeconomic management for the stability/stabilization is the significant downsize of the government to allow the private sector and markets to drive economic activities, a revised script to Adam Smith.

  • Therefore, the IMF never looks at the deep structures of country economies and societies and their specific differences. Instead, it sits on the same set of macro and sectoral economic numbers produced by central banks and directs the policy prescriptions of the same diagnosis and design with eyes closed. The IMF staffs are generally passed out economists without first-hand experience in policy management in countries. Therefore, any improvement to economic numbers of countries in the IMF program is totally credited to the IMF program without any research.

  • The fundamental defect in the IMF approach to  the macroeconomy is the use of central government budget/finance deficit as the origin of all macroeconomic risks. However, the macroeconomy in modern monetary economies is constructed and operates on the sovereign/state balance sheet and income statement that spread nerves across all sectors and units of the economy. The IMF does not have relevant statistics on its country files. Therefore, the macroeconomic diagnosis just based on central government budget deficit and debt is grossly incorrect and inappropriate. In that context, IMF stabilization programmes heavily disrupt the economies and living standards as they disconnect historically prevailing economic flows between the state sector and the private sector. Therefore, the IMF is not a treasure to be preserved at the sacrifice of the livings standards dependent on the state.

  • Therefore, IMF programmes have no success stories in stabilizing crisis-hit economies in recent decades other than proving a dollar breathing space to country leaders to survive for the time being. Instead of country stabilization, the IMF has been the way of life of political leaders to survive for the time being in the dollarized macroeconomic link. The Ethiopian case given below is seen to be another likely failure of the IMF program in years ahead.

Article reproduced

What’s Wrong with the IMF’s Approach to Ethiopia?

By Kebour Ghenna

November 23, 2024

The International Monetary Fund (IMF) recently gave Ethiopia a pat on the back, praising its economic reforms and tighter monetary policies. But let’s take a closer look—this isn’t the shiny success story it’s made out to be. In fact, it feels a bit like cheering for a marathon runner who’s barely made it past the first mile and is limping already.

  • First, the exchange rate gap. Yes, the IMF applauds Ethiopia for narrowing the gap between the official and black-market rates, but let’s not pop the champagne just yet. What’s really happened? The official rate is sliding toward the black-market rate, yet a gap of 12-15% remains. It’s like patching a leaky boat with duct tape—it’s still taking on water. Can this really be considered “fixing” the economy? Businesses struggling to access foreign currency would certainly disagree.

  • Then there’s the talk about “better management of the economy and improving the business environment.” Seriously? Tell that to the entrepreneurs grappling with inflation, dwindling purchasing power, and red tape that could stretch to the moon. Statements like this might look good on IMF stationery, but they’re not fooling the people living with the consequences.

  • A particularly troubling aspect of the IMF’s assessment is its praise for Ethiopia’s tight monetary policies. While controlling inflation and reducing central bank borrowing are important, these measures risk pushing the country into austerity at a time when growth is desperately needed. Ethiopia’s economy requires robust public investment, especially in infrastructure and agriculture, to create jobs and reduce poverty. Tight money policies could stifle this growth, further exacerbating economic challenges.

  • Most glaringly, the IMF fails to address Ethiopia’s ongoing security crises in the Amhara and Oromia regions. These regions are among the most agriculturally productive in the country, yet they are mired in escalating violence and instability. The conflict not only disrupts livelihoods but also undermines the very foundation of economic growth and food security. It is puzzling, if not outright negligent, that the IMF overlooks these significant factors in its analysis.

So, what’s wrong with the IMF? Its approach appears overly focused on technical economic indicators, sidelining the broader socio-political context that directly impacts economic performance. By ignoring the severe security issues and the lived realities of businesses and citizens, the IMF risks promoting policies that may look good on paper but fail to address Ethiopia’s core challenges. A more nuanced, inclusive, and grounded approach is urgently needed to truly support Ethiopia’s recovery and growth.

Concluding remarks

This article is a layman eye-opener on the urgent need to

  • substantially amend or disconnect the IMF-based macroeconomic management model of struggling countries like Sri Lanka and the dollarized IMF network and 

  • redesign the management models to suit the country resources and societal needs and fundamentals,
if the country leaders are interested in driving respective national economies for long-term development of living standards of generations in place of their private short-term agendas.

However, there is no sign of any country leaders having the courage and skills to move in that direction.

I am surprised how top macroeconomists of these countries behave like IMF data clerks who state that the IMF approach is the only option to save the countries from the chronic foreign currency nerve blockages lingering for decades. They have no idea of finding treasures from resources of the country to clean up such nerve blockages. Therefore, they are just L-board economists.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures. All are personal views of the author based on his research in the subject of Economics which have no intension to personally or maliciously discredit characters of any individuals.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 13 Economics and Banking Books and a large number of articles published.)

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