As the global economy stands on the edge of a financial precipice, the International Monetary Fund (IMF) armed with a paltry $200 billion rescue package attempts to intervene and prevent emerging economies from collapsing under the stressful weight of the financial turmoil. Some emerging economies are already experiencing liquidity problems and look toward the IMF to assist. Unfortunately the IMF assistance is accompanied by ridiculous conditions that often are not intended to benefit the borrowing country but to serve the interests of the imperial United States (US).
At the height of the Asian financial crisis in 1997 Japan proposed the Asian Monetary Fund (AMF) with the aim of managing regional short-term liquidity problems and to facilitate the work of other international financial arrangements and organisations like IMF. As expected the US, the IMF and the Washington Consensus rejected outright this proposal as it was going to dilute the US influence through the IMF in the region.
The finance ministers of the Association of South East Asian Nations (ASEAN) as well as China, Japan and South Korea (ASEAN + 3) met again and revived the initial idea of establishing a system of bilateral swap arrangements among the ASEAN + 3 countries under what is known as the Chiang Mai Initiative (CMI).
Under the CMI, a country experiencing conditions similar to the 1997 Asian financial crisis could borrow foreign currency from another country to augment its foreign reserves until the crisis was over. This would enable countries vulnerable to a financial crisis to access the funds in a foreign reserve pool without seeking assistance from lenders like the IMF. Through these swap arrangements, the ASEAN+3 members would be able to provide liquidity support with minimum conditions to member countries and prevent a systemic failure in those countries and subsequent regional contagion.
It is interesting that the IMF is now proposing to the emerging countries that they swap their currencies for US dollars in order to avoid becoming casualties of the current financial crisis and thus attempting to force through rescue loans to some of these countries and tie them to restrictive conditions. According to the IMF opening swap lines would give emerging nations’ central banks greater ability to lend to their local commercial banks and get US dollars circulating in overnight and short-term money markets. It is absurd for the IMF to try and force its suicidal solutions to emerging economies, when certain regions are capable of containing potential economic shocks posed by the drying up of liquidity. Between China and Japan, the two hold foreign currency reserves of over $2 trillion, enough to shore up liquidity in the event of regional distress and the region does not need IMF meddling in their economic affairs.
While the IMF does not intend to assist already weak emerging economies it remains hostile to initiatives that are directed at providing relatively unconditional assistance in the region. The IMF is only focused on providing assistance to fundamentally healthy countries experiencing short-term funding problems. Pakistan, Hungary Iceland, Ukraine and Serbia have turned to the IMF for assistance as no regional initiative in similar to the CMI exists. These countries would be subjected to conditional reforms, which would further entrench influence and control by the US of their economic destiny.
The US, through its dominance of the IMF, would impose structural adjustment programmes on these desperate countries in order to open up their markets to competition from US companies. These programmes only serve to perpetuate poverty, inequality and environmental degradation in emerging economies. They add to the structural causes of poverty by advancing reforms that deregulate labour and promote rapid privatisation of state-owed enterprises, allowing well-connected elites to reap the monetary benefits at the expense of the poor masses. The IMF has stepped beyond its original mandate of providing assistance to countries experiencing short-term balance of payments problems when it began to dictate longer-term restructuring of these economies.
It is unfortunate that regional blocks in Africa such as the Southern African Development Community (SADC), Economic Community of West African States (ECOWAS) and Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC) lack the financial strength to establish their own initiatives similar to the CMI in order to extricate member countries from the tyranny of the IMF and the World Bank. Most of the member countries to these regional blocks are already subject to the IMF’s structural adjustment programmes, which are destroying their economies. The proposed free-trade area by the SADC is the first step in the right direction in ensuring regional economic integrations and strengthening capacity of member states to improve the lives of their people.
Nervous traders are judging even healthy economies like South Africa by standards of countries like Ukraine, which face dire economic straits. Ukraine saw a sharp decline in steel prices, its main export, and a spectacular drop of its currency, the Hryyna. The country is facing political turmoil ahead of parliamentary elections in December 2008. Uninformed traders are quick to draw parallels between Ukraine and South Africa, which similarly suffered a major decline of the rand as well as enduring political wrangling between the ANC and the breakaway faction ahead of the April 2009 elections. Unlike Ukraine, South Africa, despite a drop in commodity prices and an embarrassing current account deficit, is not facing liquidity constraints and there are no indications of that eventuality in the near future.
According to the financial stability assessment report by the IMF, “South Africa’s sophisticated financial system is fundamentally sound and has so far weathered the global financial market turmoil without major pressures. Banks and insurance companies have enjoyed good profitability, capitalisation levels and reserves.” The only problem faced by the country is increased credit risk and unacceptable rate of defaults. But banks are adequately capitalised and have sufficient buffers to large shocks.
There is reason to view the IMF intervention, whether at moment of crisis or not, with suspicion. There are more reasons now given the debilitated US economy to be cautious of the IMF’s advances. The call by the IMF for emerging countries to swap their currency for US dollars raises more questions than provide answers.
Why would the IMF suggest a “solution” that would result in the currencies of those countries dropping even further in the rush to convert to US dollars? Is the IMF attempting to drive emerging economies in the same direction as Ukraine in order to secure their reliance on conditional and destructive rescue packages? Weaker domestic currencies are favourable in boosting exports; but what use is a weaker domestic currency when commodity prices have dropped considerably and the global economy is facing recession?