How the IMF is pushing an austerity-based recovery
Before the war in Ukraine, calls for a “return to normality” — or a new version of it — had started to overtake economic policy discussions. However, while the 20 wealthiest countries have started to economically recover, developing countries have not. Just 15 percent of Africans and 11 percent of people in low-income countries have been fully vaccinated. The views suggesting that the pandemic is over are far from reality where at least 3 million people have died since the emergence of the Omicron variant. The war in Ukraine and its spillover effects are resulting in a devastating convergence of crises now, threatening to increase poverty and hunger around the world but especially in the world’s poorest countries. The question is: do they have the financing and the flexibility to respond?
Since the pandemic began, Oxfam has been tracking the IMF’s financing response and specifically looking at the fiscal measures being included in its loans. Our August 2021 analysis showed how 85 percent of the IMF’s loans in the first year of the pandemic were shockingly encouraging austerity in the aftermath of the pandemic, a move which we said at that time would be devastating for inequality, already deepened through the health and economic crisis. We have now reviewed the 23 COVID-19 loans approved in the second year of the pandemic, and found that the Fund is once again pushing for austerity. However, this time it is not simply encouraging austerity, but requiring it as a condition of financing. The majority — 87 percent — of IMF loan programs negotiated with low- and middle-income countries between March 16 2021 and March 15 2022 require austerity or fiscal consolidation. More on this below.
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“Once again, we are asking you to undertake fiscal consolidation”
Of the 15 conditionality-based programs — which is where the rubber really hits the road in IMF influence on fiscal and monetary policy — we find that 13 require countries to adopt fiscal consolidation as a condition of financing. Furthermore, looking at the IMF’s 2021 Article IV reports for African countries, we find that all of them, except one, are encouraging countries to pursue fiscal consolidation. For example, the IMF advised Ghana to pursue a more aggressive fiscal tightening, and Nigeria to increase the VAT rate to 10 percent this year and 15 percent by 2026.
It is worth noting that 12 of the 15 countries who recently obtained an IMF loan program had already received conditionality-free emergency financing during the first year of the pandemic. In our previous blogs we pointed out that the IMF had encouraged countries to pursue fiscal consolidation once “the health crisis abates”. By conditioning fiscal consolidation in its new batch of loans, the IMF has started to operate as if the crisis has indeed passed. This is extremely worrying as countries have started to roll back their COVID-19 support measures to achieve the deficit reduction targets set in these loan programs. This is occurring at a time when the pandemic is still ongoing and the crisis is being compounded by historic food and energy price hikes exacerbated by the war in Ukraine. The austerity measures envisaged under these new IMF loan programs are likely to turn a devastating situation into an unbearable one.
VAT still prevails
In the IMF’s 2021 Fiscal Monitor, the institution stepped up its discourse and research on the need for fairer and more progressive tax systems to reduce inequality and raise revenues for the COVID-19 recovery. Nevertheless, this has clearly not materialized in the new loans. The IMF required regressive tax measures such as expanding VAT coverage in nine loans and encouraged them in an additional four. Much of these measures consist of taxing essential items that were exempt under existing VAT laws. For instance, Kenya expanded VAT coverage to include cooking gas, fuel, and some food items, resulting in significantly increased prices even before the shock from the war in Ukraine which has hit the poorest hardest. Meanwhile, the IMF is requiring Cameroon to widen its VAT coverage and remove exemptions while replacing them with conditional cash transfers. While this has not materialized yet, it implies that the government could be expected to impose VAT on basic food items. Surinam is being forced to increase its sales tax on imported goods by two percent and on domestic goods and services by four percent before obtaining its loan.
It’s not all sour: five loan programs had tax provisions that could be considered progressive. For example, the Republic of Congo will phase out some corporate tax exemptions under existing investment conventions, and Kenya has introduced a one percent tax on gross corporate turnover. Personal income tax reform only featured in Sudan’s loan, in the context of unifying rates between the public and private sector wages without altering the structure of the tax. These measures are encouraging, and they should feature more in IMF programs. However, in these cases, they are largely tweaking the existing tax structures without transforming them. The IMF must take a firm direction towards progressivity through wealth taxes under different forms, increasing progressivity of Personal Income Taxes and Corporate Income Taxes while refraining from increasing and widening regressive taxation.
Freezing wages will force decreasing real incomes in times of inflation
As was the case with previous IMF loans, and as the usual austerity prescriptions go, there is a heavy emphasis on containing the public wage bill and removing subsidies. 10 loans feature provisions of containing or reducing the public wage bill. Under the IMF program conditionalities, Kenya has already frozen wages in the public sector for three years at a time when prices of basic commodities are on the rise, effectively reducing the real income of public servants. The IMF expects that Namibia returns to fiscal consolidation in 2021–2022 through eliminating indexation of wages to inflation, which means decreasing the real value of wages as inflation increases. Furthermore, in several of the loans, wage expenditure reduction is also likely to occur through the sale and liquidation of state-owned enterprises (SOEs). Regardless of whether SOEs are functioning efficiently or not, this will undoubtedly lead to many people finding themselves unemployed. These wage bill measures could not come at a worse time, with inflation rising all over the world compounded by the food and energy price crises. Not to mention, wage and hiring freezes are likely to have a destructive impact on public service provision, hampering countries’ efforts to hire urgently needed doctors, nurses and teachers. Even though the Fund has been including social spending floors in loan programs, often they do not include wages of education and healthcare workers.
The IMF has also required subsidy reform or phasing out of fuel and electricity subsidies for five countries. As part of its IMF loan program, Sudan scrapped fuel subsidies in 2021, leading to the price of fuel nearly doubling. This has been made worse by further spikes in food prices contributing to pushing the country into deeper hunger and instability.
Social Spending on shaky floors
The IMF has maintained social spending floors in its programs related to pandemic preparedness, vaccination, as well financing safety nets such as cash transfers and other programs. For instance, the social spending floor for Kenya includes securing resources for free primary and secondary education. In the Republic of Congo, the IMF program aims to increase social expenditure on social assistance, healthcare, education, and other development needs. It is encouraging to see the Fund persisting on these issues; however, these floors remain insufficient, especially as there is no clear indication of how the amounts of spending were decided. For example, the 2021/2022 Kenyan national budget dedicates a meagre four percent to health spending, and Chad had dedicated only 8.5% of its 2022 budget to health spending — both falling extremely short of the Abuja commitment by African governments to spend at least 15 percent of their budgets on health. Furthermore, countries often find it hard to meet their social spending targets while meeting their deficit targets, as meeting the latter trumps the former in terms of assessing IMF program success. Countries are bound to deficit targets as a condition of financing, but not (in the same way) to social spending. Evidence of past programs indicate that these floors are not always met. This has been the case for countries within the sample we looked at, such as Madagascar and Gabon who have previously undergone IMF programs and missed their social spending targets. The Fund also continues pushing for targeted safety nets instead of universal social protection and is encouraging countries to roll back their COVID-19 spending measures to achieve fiscal consolidation.
Many of the countries we looked at could possibly meet their social spending targets in the very short term, benefiting from the August 2021 $650 billion SDR issuance. 14 countries used all or part of their Special Drawing Rights (SDRs) to finance their budgets, specifically social spending, which highlights the importance of the SDR issuance. However, it also raises questions about whether countries can sustain their social spending after using their allocation while being bound to strict deficit targets set by the IMF.
End Austerity
Taken together, these fiscal consolidation measures risk meaning that severe health worker shortages and ill-equipped health facilities will continue to cripple lower-income countries’ COVID-19 response, and hard-hit public-school systems will struggle to meet the needs of the millions of children who have been left behind during pandemic school closures. At the same time, budget pressures for health, education and other essential public services are becoming even more severe. For example, the World Bank is projecting that government health spending will drop and remain below pre COVID-19 levels in 52 low-income countries.
The pandemic has not receded, nor has the IMF’s push for austerity. The ripple effects of the war in Ukraine combined with the scars of the pandemic are already being felt in many low- and middle-income countries. Although there are signs that the Fund is making more efforts to protect social spending, the fiscal consolidation paradigm persists. This undermines public services and a fair and sustainable recovery. Instead of pushing painful austerity measures, the IMF should help countries navigate these turbulent times through a series of actions:
- Immediately suspend all conditionality in its ongoing loan programs, especially for countries feeling the brunt of the impact of the war in Ukraine.
- Resume conditionality-free emergency financing as the dominant mode of financing as it did at the onset of the pandemic in 2020.
- Do all it can to support countries to prioritize and implement progressive tax measures, such as wealth taxes to increase fiscal space for government spending and reduce inequality.
- Promote the urgency of debt cancellation and debt-free financing including exploring a new issuance of Special Drawing Rights and the sale of IMF gold holdings.
This post was written by Oxfam International’s Senior Policy Advisor on IFIs, Nabil Abdo, with contributions from Fiana Arbab, Oxfam International’s IFI Fellow.
