Turkey and Latvia were in the news last week, having joined the list of governments whose IMF disbursements are being withheld because they find it politically impossible to impose the required punishments on their citizens.The IMF sees these measures as necessary and pre-determined – in most cases by the borrowing countries' having run-up unsustainable external or budget imbalances. But in fact the IMF has a long track record – dating back decades – of imposing unnecessary and often harmful conditions on borrowing countries.Latvia missed a 200 million euro disbursement from the IMF in March for not cutting its budget enough. According to press reports, the government wants to run a budget deficit of 7% of GDP for this year, and the IMF wants 5%. Latvia is already cutting its budget by 40%, and is planning to close some public hospitals and schools in order to make the IMF's targets, prompting street protests.
Latvia's GDP crashed by 18% in the first quarter of this year, after a 10.3% drop in the preceding quarter. These are among the worst declines in the world. This indicates that the IMF's prescription is serious overkill. The purpose of IMF aid is supposedly to make any necessary adjustment easier, not worse.
Pakistan is facing serious political problems right now, having recently launched a major offensive against a growing Taliban insurgency. Slowing Pakistan's economy at a time when the global economic crisis is already doing that may not be the best policy from the point of view of political stability. The IMF has negotiated an increase in Pakistan's fiscal deficit from 3.4% to 4.6% of GDP, but is holding the line against lowering interest rates.
In almost all of its standby arrangements negotiated over the last year, the IMF has included conditions that will reduce output and employment in situations where economies are already shrinking.