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This July marks the 10th anniversary of East Asia's financial crisis. In July 1997, the Thai baht plummeted. Soon after, financial panic spread to Indonesia and Korea, then to Malaysia. In a little more than a year, the Asian financial crisis became a global financial crisis, with the crash of Russia's ruble and Brazil's real. This marked the first wave of departures of middle income countries from the IMF sphere of influence. In a second stage, other countries like Russia decisively abandoned their programmes with the institution.

Listening to some "analysts" one remains with the impression that the IMF maintains the same power and influence it enjoyed five or even three years ago. But the truth is that a real debacle in terms of power and influence began to dawn on this institution as of 2005.

The first step towards the loss of IMF influence, was the reaction of Asian middle income countries – once the East Asian financial crisis came to an end – to the truly traumatic experience they had to face as a result of the draconian demands imposed by the Fund during the crisis.

Since then, these countries started to accumulate international monetary reserves – to the point that nowadays, countries under the “Chiang Mei” initiative have come to account for 50% of global reserves – in order not to be forced to resort to the IMF, in the event of another financial crisis.

This marked the first wave of departures of middle income countries from the IMF sphere of influence. In a second stage, other countries like Russia decisively abandoned their programmes with the institution.

The other major change resulted from the Argentine confrontation with the IMF, when this country – following the collapse of the so-called Convertibility Plan backed by the Fund – decided to default on its external debt and apply policies that were completely antagonistic to IMF recommendations in order to find a way out of the crisis.

However, the policies of the Argentine government – harshly criticised by the IMF – have translated into five consecutive years of high economic growth (at an average annual growth rate of 8.6%, which turns this country into the fastest growing economy in the Western Hemisphere), together with macroeconomic stability and poverty reduction (9 million people out of a total population of 36 million were lifted out of poverty during this period).

Argentina also underwent a sovereign debt restructuring process, facing sucessfully again IMF pressures and achieving, once again, spectacular results (a “haircut” in the present value of debt amounting to 30% of GDP).

For the first time in history, a middle income country stood up firmly against the IMF and achieved categorical success in doing so.

The rest is history. As of 2005, starting with Argentina and Brazil, and followed by Georgia, Uzbekistan, Indonesia, Thailand, South Korea, Serbia, Russia, Uruguay, Bulgaria, Algeria, Zimbabwe, Armenia and other countries, one after the other, they all started to pay off their IMF loans ahead of schedule.

Meanwhile, Ukraine and Pakistan, the IMF’s third and fourth largest debtors, halved their debts to the institution through early payments.

As a result, the IMF’s current loan portfolio plummeted at an unprecedented fast rate, falling from $108 billion in 2003 to just $17.6 billion nowadays (a 83.7% decline!), reaching so far in 2007 its lowest level in 25 years. Fifty per cent of this current loan portfolio is concentrated in just one middle income country: Turkey.

The problem regarding this massive “bleeding” in terms of IMF middle income clients is that the Fund depends on income paid by way of interest resulting from loans granted mainly to middle income countries. On account of this, the IMF has started to bear large deficits regarding finance required to cover its budget.

The IMF is now paying the toll for having ill-treated those countries that resorted to it in search of assistance, which have now completely turned their back on the institution.

According to Stiglitz: “IMF debtor countries have been financing this institution through the spread paid on the resources granted as loans. At the present time, the problem is that nobody no longer wants to get IMF loans. Usually, banks try to be friendly to their clients, and the history of the IMF has not been stellar in this respect. Thus, the fact that the IMF has lost almost all its important clients and that only one country (Turkey) accounts for half of its current loan portfolio should not be surprising. I tell my friends in that country: have you really made the decision that you want to continue maintaining this institution?”.

Under these circumstances, if rumours that Turkey is also planning to pay off its IMF debts ahead of schedule proved to be true, this would imply a real catastrophe for the institution, not just because of its clear financial implications but for the fact that the Fund would be losing the only major client it has left, and along with this, all the vestiges of power and influence it once enjoyed.

This is what explains the new and shocking humility of IMF officials. The Fund’s present situation is really sad, and its future survival might depend on the restraint it currently displays.

The main clients that have remained with the IMF are the world’s poorest countries, particularly African and Asian HIPC countries, as well as Haiti (and now, once again, Nicaragua) in Latin America.

Operations with these clients do not represent profits but net costs to the IMF. Loans thus granted are subsidised and should cover the high administrative costs thereof by means of the increasingly insufficient contribution of rich countries.

Of course, the IMF as an institution does not appear to be willing to continue being involved in concessional credit operations with these countries (although the staff working in the follow-up to programmes with these countries are craving to keep their jobs from disappearing).

Given the fact that donors, in the case of Nicaragua – as was previously the case in Bolivia – are no longer pragmatically conditioning disbursements on the existence of an IMF Programme, and having thus said so, it is evident that the reasons why the Government of Nicaragua sought this institution in such haste are above all political, that is to say, in order to look for international backing and send a signal that its policies will continue to be the “right ones”.

Related information:

* 10 years after Asian financial crisis, IMF fights for legitimacy, by The Manila Bulletin

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