• Wed. Apr 24th, 2024

IMF reckoning on fallout with rogue nations

International Monetary Fund Managing Director Kristalina Georgieva &nbsp






Author: John Muchira, Features Writer


Africa and the International Monetary Fund (IMF) have for years been strange bedfellows. In times of economic bliss, the continent often tends to deal with the IMF at an arm’s length. Yet when the tides turn and economies take severe beatings, a majority of African countries turn up at Washington DC with a bowl in their hands, begging. This offers the opportune moment for the Bretton Woods institution to demand ‘structural reforms.’ For most African governments, there is often no escape route.

Over the past two years, this has been the reality playing out in Africa. With the economies of African countries like Egypt, Kenya, Ghana, Zambia, Tunisia and Nigeria among others ravaged by debts, impacts of Covid-19 and external shocks including the Russia-Ukraine war, the continent has witnessed a forceful return of the IMF. As a tradition, the multi-lender has come bearing a basket of conditions for bailouts and other forms of financing. In effect, this has evoked the memories of the 1980s and early 1990s when structural adjustment programmes (SAPs) left a bitter taste in the mouth of African countries.

“The IMF is a firefighter. When you call the firefighter, you should not expect them to provide any meaningful help with structural problems caused by a fire,” says Ken Opalo, Associate Professor at the Georgetown University Walsh School of Foreign Service. He adds that, largely, the current relationship between African governments and the IMF is fundamentally different compared to the crises of the 1980s and 1990s. However, the common denominator between then and now is that African nations are in desperate need of finances from the IMF’s deep purses owing to prolonged economic crises.

Currently, a majority of African countries are going through a state of economic turmoil. In fact, the IMF reckons in its regional economic report released in October that, for sub-Saharan Africa, 2023 has been a difficult year. Owing to inflation, exchange rate pressures and elevated debt vulnerabilities, gross domestic product (GDP) growth is expected to fall for the second year in a row to 3.3 percent from 4 percent last year. Though a rebound is forecast next year to 4 percent, this is not guaranteed. “A slowdown in reform efforts, a rise in political instability within the region, or external downside risks could undermine growth,” states the IMF in the report.

Putting out fires
The forceful return of the IMF to put out economic fires across Africa has been in the making in recent years. In Egypt, massive borrowing by the President Abdel Fattah el-Sisi regime to fund extravagant mega projects has sunk the country into a debt abyss. External debt, according to the Central Bank of Egypt, currently stands at $157.8bn. Apart from debt, the country is also struggling with foreign exchange shortage at a time when the Russia-Ukraine war has pushed commodities and oil prices through the roof. The effect has been a local currency in a state of paralysis and skyrocketing inflation that hit 39.7 percent in August this year compared to six percent in the same month in 2021. Under the worsening economic realities, Egypt has turned to the IMF for a $3bn bailout.

This time the IMF is paying more attention to safeguarding developmental gains

The economic crisis in Egypt is similar across many other African countries. In Zambia, default on external debts amounting to $17.3bn has forced the country to beg for a $1.3bn IMF bailout. In Ghana, severe economic and financial challenges including defaulting on some of its domestic and international debts saw the country turn to the IMF for a $3bn 36-month financing arrangement. Tunisia, on its part, has negotiated for a $1.9bn bailout, while Kenya secured $1bn under its extended credit facility with the Bretton Woods institution.

Maged Mandour, a political analyst and author of the upcoming book Egypt Under El-Sisi, contends that the economic crisis in Egypt, as in most other African nations, is deep and the IMF offers a remedy, albeit with bitter conditions. “The desperate need for bailouts gives the IMF the edge in pushing for structural reforms,” he states. He adds that in the case of Egypt, the IMF cannot afford to bury its head in the sand akin to 2016 when it approved a $12bn loan but opted to ignore the deep control of the economy by the military. “Conditions on the current loan aim to force the government to demilitarise the economy,” he notes.

The fact that the IMF is determined to push reforms in troubled economies is evident. For countries seeking bailouts and emergency financing, the lender has imposed tough conditions and implementation of austerity measures. This means an end to government subsidies on commodities and fuel, increases in taxes for governments to generate more revenues to meet their debt obligations, privatisation of burdensome state companies, a cut down on unnecessary expenditure, layoffs to reduce the public wage bill, adoption of fully flexible exchange rate regimes and enhancing transparency and accountability, among others.

Safeguarding sectors
According to Opalo, unlike the SAPs of the 1980s and 1990s, the IMF has somehow changed and is today more realistic. Considering that African countries and their political and policy processes are also a lot more mature, the IMF understands that the push for structural reforms should not come at the expense of social sectors. “This time the IMF is paying more attention to safeguarding developmental gains made in education, healthcare and other social sectors,” he notes.

The desperate need for bailouts gives the IMF the edge in pushing for structural reforms

For governments, however, the pain of the conditions is unbearable. In the case of Egypt, for instance, the IMF push for an end to the military’s tight control of the economy, a situation that has suffocated the private sector, is causing discomfort. The government is preparing 32 state companies for privatisation, the majority of which are under the control of the military, and has even signed deals worth $1.9bn, but President El-Sisi knows that his continued hold on power is entangled with keeping the military happy. Though the regime has reluctantly agreed to privatise state entities, it is bluntly refusing to implement the condition of further devaluation of the Egyptian pound, not before presidential elections slated for December.

“Egypt is not ready for a radical departure from the current configuration,” avers Mandour. This, to a large extent, explains why the IMF is withholding disbursements agreed under the $3bn bailout. Disbursements under the 46-month programme that was signed in December 2022 are subject to eight reviews. The first was originally scheduled for March but is yet to happen owing to the fact that the IMF is unhappy with the country’s progress in fulfilling the terms of the agreement.

Unbearable terms
Egypt is not the only African nation that is edgy with the IMF conditions. In Tunisia, President Kais Saied has rejected what he termed as ‘diktats’ for the $1.9bn loan package agreed in October 2022.

Despite reeling in a deep debt hole amounting to $36.2bn, which is 77 percent of GDP, Tunisia wants the IMF to review the conditions of the loan. For the country, abolishing food and energy subsidies and making layoffs to cut the public wage bill are bound to instigate unrest. Notably, Tunisia has been bold in standing up to the IMF owing to its unique location that enabled it to reach a financing pact with the European Union aimed at stemming irregular migrations. The country has already secured $135m under the pact. “Tunisia is basically blackmailing the EU to get funds to stop migrants,” says Mandour.

But not all countries are playing hard ball. Kenya, Nigeria, Zambia, Angola and The Gambia are among countries that are adhering to the IMF conditions. Kenya, for instance, stands out. The East Africa nation has faithfully implemented IMF conditions for its $1bn financing package. These include abolishing food and fuel subsidies, doubling of value added tax on petroleum products from eight percent to 16 percent and embarking on restructuring of troubled state corporations, among others. Some of the reforms, which have earned Kenya rare praise from the IMF, have ignited protests due to skyrocketing costs of living. “We commend you for what you are doing on your fiscal measures. The country is certainly headed in the right direction,” said Kristalina Georgieva, IMF Managing Director during a visit to Kenya in May.

The love-hate relationship between the IMF and African nations has become one of the critical drivers for the clamour for widespread reforms of the global financial architecture. The continent has been vocal on the fact that the international financial system is overwhelmingly based on a creditor-centred model. In essence, the model often locks out African countries from fair, concessional borrowing. In addition, Africa contends that the system restricts access to affordable capital and is also characterised by ‘conditional’ lending. For the continent, reforms would not only open doors for debt relief but will also unleash floodgates of financing. Currently, Africa’s public debt stock stands at a staggering $1.8trn.

“African governments must manage their finances better even as they push for debt relief and more reasonable evaluations from credit rating agencies to lower their cost of borrowing,” notes Opalo. Failure to adopt prudent management of public resources means the cycle of economic crises is bound to continue. For this reason, the IMF will always be on hand with its bitter pill of structural reforms.

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