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If ever an International Monetary Fund (IMF) lending program highlighted the need for basic reform in the IMF’s lending practices, it has to be that of its recently concluded Ukrainian stand-by arrangement. Despite Ukraine’s poorest of track records with past IMF loan performance and despite the unusually high risks that surround the country’s political and economic prospects, the IMF is choosing to provide this country with “exceptional access” to its resources. By so doing, the IMF would appear to be undermining its credibility as a conditional lending agency. Worse yet, the IMF would seem to be giving rise to moral hazard in the global financial system and to be putting international taxpayers’ money at considerable risk without prior legislative approval.
Under normal circumstances, the IMF has access limits that constrain its lending to 200 percent of a country’s IMF quota each year with a maximum access limit of 600 percent of quota over a three-year period. In “exceptional circumstances” the IMF can well exceed that limit, as it did in the cases of Greece, Ireland and Portugal, where the IMF committed between 1,500 percent and 2,000 percent of those countries’ respective quotas.
Such exceptional IMF lending is supposed to be justified by the country meeting all of the following four criteria: (a) the country must be experiencing exceptional balance of payments pressure; (b) there must be a high probability that the country’s public debt is sustainable in the medium term; (c) the country must have good prospects of regaining access to private capital markets; and (d) the country’s policy program must have a reasonably strong prospect of success, including not only the country’s adjustment plans but also its institutional and political capacity to deliver that adjustment.
“Can one really argue that Ukraine has a reasonable chance of regaining access to capital markets when the country appears to be on the brink of civil war?” – Desmond Lachman
Undaunted by its own criteria, the IMF is choosing to commit to Ukraine $17 billion, or 800 percent of quota, over a two-year period, which is double the size of the IMF’s normal lending limit. The IMF is also already forewarning that it might need to upsize its lending commitment, should Ukraine’s financing needs turn out to be larger than the IMF is presently anticipating.
The fact that the IMF is committing resources to Ukraine on such a large scale underscores the point that when there is a political willingness among the IMF’s major shareholders, there is no real limit as to how much money the IMF can loan a country. Using the “exceptional access” route, it would seem that any amount of IMF financing can be provided to a country notwithstanding the IMF’s supposed criteria for exceptional access.
Can one really argue, as the IMF is now doing, that Ukraine’s economic program has a reasonable chance of success when Ukraine has never before complied with an IMF program and when Ukraine’s parliament and government continues to be characterized by a high degree of corruption? Or can one really argue that Ukraine has a reasonable chance of regaining access to capital markets when the country appears to be on the brink of civil war and when Russia continues to abuse its massive leverage over the country by raising its natural gas export prices to exorbitant levels?
To be sure, maintaining the IMF’s “exceptional access” lending policy unchanged will continue to provide G-7 policymakers with a mountain of money that can be easily and quickly disbursed in time of crisis, as the recent Ukrainian case amply attests. However, this flexibility comes at a high price, which would suggest that a review of the IMF’s exceptional access lending policy is long overdue. For continued recourse to IMF exceptional lending for political purposes risks further tarnishing the IMF’s role as a catalytic lender and as the provider of a seal of good housekeeping. It also contributes to putting taxpayer money at risk without legislative approval and it contributes to moral hazard by rewarding imprudent private sector lending to countries by not forcing private sector creditors to be bailed in.
Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the IMF’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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