The Function and Governance of IMF Lending Policies in Malawi
The International Monetary Fund was established at the United Nations Conference held in Bretton Woods, New Hampshire, United States in July, 1994. The IMF's goal is to build a framework of cooperation between nations into hasten up post-war reconstruction, to aid political stability, and to encourage peace (Lele 154).
The IMF membership is at 188 countries. According to the organizational structure, each participant country in the organization is allocated a quota according to its contribution to IMF reserves. The IMF performs economic survey of its members in order to provide technical assistance and training to its member states to help them build strong economies. Its main objective is to safeguard the stability of the international financial system which is essentially the structure of monetary transaction between countries that enable them to interact with one another. Other functions of the organization include monitoring and preventing international financial crises as well as cooperation with the member countries to promote the development as well as to eradicate poverty.
The IMF has three areas of focus in implementing its mandate and these include, surveillance of global economies, providing technical assistance and training to member states as well as providing financial loans.
The work of the IMF includes promoting global economic growth and stability and it accomplishes this goal by insisting that member countries develop comprehensive economic and financial policies. In order to achieve this, the IMF constantly conducts surveillance and reviews international, regional as well as national level economic developments of its member states.
In order to strengthen the member states’ capacity to create and implement effective financial policies, the IMF provides essential technical assistance and training. Facilitating technical assistance ensures that vital expertise is provided in the event of lack of capacity, and this means well-crafted economic policies and programs.
National governments encountering financial difficulties with balancing their finances are given a respite with IMF loans. IMF provides the member countries with options to offset their budgetary deficits by working together and forming policy programs supported by financing. These credit agreements between the IMF and member countries are dependent on pre-contracted terms and conditions. Loan access is dependent on the country’s quota in the organization but recently, the IMF lending policies were reformed to allow low-income countries to access double of their previous loan limits while concurrently reducing interest rates. This was done to strengthen the organization’s lending capacity to avert crises especially in the aftermath of the recent global economic crisis.
IMF has introduced policies during the 2008 financial crisis for granting loans to countries. These policies require that the applicant country should first reduce fiscal deficits and inflation levels, ensure that international reserves are shielded from depletion, minimize public spending through decrease of expenditure and increase of taxation, hike interest rates and minimize increase of money supply, prevent currency devaluation and provide financial sector liquidity as required.
Malawi is ranked as one of the world’s lowest per capita economies according to a study conducted by United Nations Development Program (UNDP 2006). More than 80% of the population in Malawi lives in the rural areas of which 65.3% live in poverty, (Malawi National Economic Council 2000).
Malawi’s Economy before 1960 was mainly commodity based and laid great emphasis on goods with the potential to be exported such as agricultural produce including tea, tobacco, coffee, as well as cotton. These crops were grown by only a select few who could afford expensive inputs required while the poor were practicing noncommercial crop production. The colonial government imposed the new farming technologies on the poor indigenous farmers with disregard to the appropriateness of the practices, and this led to growing poverty among the local farmers (Moyo 202).
At the dawn of independence in 1964, Malawi began investing in food production to ensure self-reliance in terms of having enough food for the farmer as well as for the entire nation. In order to attain this goal, the government-subsidized agricultural inputs and increased availability of essential farming implements. This greatly improved the living standard of the common citizen, but the only problem was that these crops did not generate adequate returns and poverty still remained a major economic obstacle.
To help alleviate the country’s poverty and to improve the economy, Malawi adopted Structural Adjustments Policies (SAPs) in 1986 as a condition to loans given by the IMF. These SAPs involved major reforms in the economic and agricultural sector. The SAPs imposed strict rules including increased privatization and reduced protection of domestic industries, currency devaluation, increased interest rates, elimination of subsidies of common goods such as food, changing regulations as well lowering standards to attract foreign investments. The changes in the agricultural sector involved removal of subsidies in which the poor farmers depended on and agricultural market liberalization. Market liberalization meant that farmers were no longer limited to buy or sell agricultural produce to the Malawi Agricultural Development and marketing Corporation (ADMARC) which opened the market to private entities and caused changes in product prices.
IMF is among the most powerful institutions globally and is among the major sources of loans to Developing countries. As the ‘last resort’ source of emergency loans, the IMF has the leverage to impose policies as well as dictate changes in the economies of borrower countries. According to Molina-Gallart and Muchhala (2012), economic policies attached to loans given by international financial institutions are being unfairly used as tools to compel developing nations to adopt market-oriented economic policies as observed in the case of Malawi. These policies have been criticized by the international community to undercut national autonomy and economic development.
According to Collier and Gunning (1999), in the 1980s most African nations adopted Structural Adjustment Programs at the insistence of International Financial Institutions. These SAPs were a combination of short term and long term solutions aimed at stabilizing economies and transforming them from being heavily controlled to being market based economies. In essence, these policies required African Governments to bring down trade barriers and to open their markets for foreign investments (123).
In their Paper, Collier and Gunning (1999), further argue that the SAPs are a disadvantage to the poor since it encourages reduction in government spending on healthcare, education and other essential social services.
This is the time of increasing globalization. The global markets are getting more integrated and interdependent as the time goes, and this means that the collapse of one nation’s economy causes a similar domino effect of world markets. This means that one nation’s economic crisis is a global economic danger. Due to this reason, globalization is more necessary than before which makes global governance essential today.
The actors in global governance, the states, are responsible for providing resources and forming coalitions while the International Institutions serve as a uniting forum. Their main responsibilities include stabilization of world economies and to promote good governance but are they doing that?
According to the theory of realism, each state seeks to maximize its wellbeing because every country is in competition. It further says that International Institutions serve no other purpose but as a tool of power of countries to further their interests.
Take the case of Malawi and the IMF. The policies imposed by the IMF towards Malawi in exchange of loans clearly indicate that the IMF, which is mainly controlled by wealthy western powers, is mainly interested in its interests. The IMFs focus on forceful adoption of new policies poorly suited to the developing nation was done to enable quicker repayments of the loans in detriment to the country’s domestic needs.
The main objectives of the IMF are to promote global economic growth, ensure stability and to fight poverty in developing nations. It purports to do this by offering financial assistance to countries encountering financial crises. This case study shows that the IMF is contradicting itself as the results show that developing nations receiving IMF loans continue to dwell in poverty and rising debts while the standards of living among the poor remains low. Low standard of living fuel political violence and insecurity as people fight for the limited resources. Works Cited
International monetary Fund website, International Monetary Fund, 2014. Web. 3rd October, 2014.
Collier, Gunning, The IMF’s role in structural adjustments. Oxford, UK: Centre for Study of African Economies. 1999. Print.
Mollina-Gallart, muchhala, Strings Attached; How the IMF’s Economic Conditions Foil Development-Oriented Policies for Loan-Borrowing Countries. Penang, Malaysia. Third World Network: 2012. Print.
Easterly. The Association of Policies and growth with repeated IMF and World Bank adjustment loans. New York, United States: Elsevier Journal of Development Economics. 2005. Print.
Lele. Structural Adjustment, Agricultural Development and the Poor: Some lessons from the Malawian Experience. Great Britain. Pergamon Press. 1990. Print.
Konadu‐Agyemang, Kwadwo. The best of times and the worst of times: structural adjustment programs and uneven development in Africa: the case of Ghana. The Professional Geographer. 2000. Print.
Przeworski, Adam, and James Raymond Vreeland. The effect of IMF programs on economic growth. Journal of development Economics. 2000. Print.