The IMF’s Lazy Economics Will Not Save MENA

The IMF’s Lazy Economics Will Not Save MENA

A protest against the World Bank Group and International Monetary Fund’s policies during the 2023 Annual Meetings of the WBG/ IMF, held in Marrakech from October 9 to October 15.  Image credit:

The global debt crisis is here. Developing countries find themselves teetering on the edge of a bottomless pit of debt distress. As of 2022, global debt has surpassed a staggering $90 billion, a fivefold increase compared to the levels seen in 2020.  At present, nearly 50% of the global population reside in nations where public resources are largely allocated to service debt payments rather than for public services.

In this analysis, the Arab Watch Coalition¹, seeks to offer a diagnosis of IMF programming in the MENA region, particularly in the context of the recent global debt crisis and the Annual Meetings that took place in October 2023. By centering our discussion around the IMF’s role and strategies, we aim to provide insights into alternative, more sustainable and equitable approaches as a way forward.

 Diagnosis 1: The IMF is still ‘big’ on austerity 

Come the end of the Annual Meetings, AWC has developed a clear diagnosis of IMF programming in MENA– it is lazy economics. 

Fiscal consolidation repackaged

While the Fund has been promoting a shift away from fiscal consolidation, the actual situation on the ground reveals a sobering narrative. Austerity policies endorsed by the IMF continue to take center stage, with minimal regard for socio-economic realities within poorer nations. Although such measures may contribute to short-lived financial stability, evidence suggests they exact a catastrophic toll on the social fabric. Education, healthcare, and social welfare programs are slashed, disproportionately affecting the most vulnerable in society, coupled with state-sponsored regressive taxation. These measures, widely considered by governments globally and perpetuated via IMF policies, come with significant social and economic costs.

In fact, according to Oxfam in 2021, the IMF has systematically encouraged countries to adopt austerity measures post-pandemic, thereby driving a severe spike in already high inequality levels. This is corroborated in a report by the End Austerity campaign. In 88 developing and 32 high-income countries, 120 governments have been contemplating rationalizing social assistance. Simultaneously, approximately 91 governments in 64 developing and 27 high-income nations are exploring ways to cut the public sector wage bill, directly affecting essential services. 

Zooming in on developing countries

 External public debt in the Arab region grew considerably from 2010 to 2021, increasing from 23% to 37% of GDP and from 71% to 122% of exports², highlighting a significant escalation  relative to economic output. In 2021, the MENA region faced formidable challenges as its external public debt service reached USD 33 billion, encompassing both principal and interest payments. To put this into perspective: during the same year, in countries like Tunisia, debt servicing accounted for around a quarter of total government expenditure, while in Yemen, it represented a fifth³. Similarly, in Sudan, Egypt, and Morocco, debt interest payments had surged to a significant 16.3% of government expenditure. These figures not only illustrate the substantial financial burden imposed by such spending priorities but also highlight the scale of resources diverted from other critical areas of public investment. In the face of such expansive debt, the IMF mobilized finance through special drawing rights (SDRs) to support crisis-torn economies4 , following the pandemic. While their allocation helped provide some liquidity to the cash-strapped governments, the distribution was largely skewed towards advanced economies. Of the USD 650 billion in SDRs distributed,  low and middle-income countries in the region – a primary focus of this analysis– received only around USD 15 billion

Even more concerning is the fact that interest payments within developing countries in the region have grown at a pace that surpasses the expansion of public spending on critical sectors such as human capital and other forms of social investment. Another lens through which this is visible is the IMF surcharges. Those are additional fees imposed by the Fund on loan amounts that exceed certain thresholds or are extended over prolonged periods. These surcharges are levied on top of regular loan repayments and interest payments. For example, Egypt pays over $167 million annually in these surcharges, funds that could otherwise support essential social programs. The cumulative effect of surcharges is substantial, with projected interest payments due to surcharges reaching around $7.9 billion for affected countries from 2021 to 2028​​​​. These fees add a considerable financial burden to countries already facing debt challenges and hinder their ability to allocate resources for development and poverty alleviation. This comes to show that debt is not asocial – as opposed to what the IMF keeps on implying.  

Diagnosis 2: The critical absence of feminist economics in program design

Analyzing austerity policies through the feminist lens of care work  — an area particularly relevant to women in the MENA region — reveals a more nuanced understanding of their impacts.

This approach reveals how austere fiscal policies exacerbate the burden of care work such as childcare, elderly care, nursing, and household management more generally. In the MENA region, women disproportionately bear the burden of this work, often spending up to five times more on these tasks compared to men. When public services are curtailed due to austerity, the demand for unpaid care work typically increases, placing an additional strain on women.

These effects may be seen through two lenses. Firstly, with limited public healthcare, women, already burdened by the demands of unpaid care work, face additional challenges in accessing necessary health services for themselves and their families. This lack of accessible healthcare services can simultaneously exacerbate the physical and mental strain of their unpaid work. Secondly, when education services are scaled back for women by way of austerity, it acutely impacts their economic power. This reduction forces women and girls to shoulder more unpaid care work, as educational opportunities diminish and public services become less accessible. Consequently, this not only perpetuates gender inequalities but also hinders women’s potential for economic independence and their societal contributions, thereby re-affirming the cycle of disempowerment that the Fund claims it is fighting.

Diagnosis 3: A One-size Fits All Approach Does Not Work

The  IMF’s standardized approach to loan programs in the MENA region has repeatedly fallen short, proving to be both ineffective and costly. It’s increasingly clear that the Fund must adopt a more tailored, context-sensitive strategy to achieve better social and economic outcomes.

IMF officials often bring up ‘crowding out’ a reasoning for downscaling government spending. Such an assumption posits that increased public investment, through state-owned enterprises for example, might detract from private sector investment– an area crucial for growth. However, this assumption requires a more nuanced evaluation, especially when considering the impact on sectors such as health and education. In these areas, public investment is not only indispensable but often complements rather than displaces private investment, thereby enhancing socio-economic welfare and labor productivity. It is vital to assess the effects of spending on a contextual basis, rather than issue blanket loan conditions.

Public sector employment in the MENA region also highlights the need for this refined approach. This sector is a significant employer, especially for women, offering more equitable pay, benefits, and job stability compared to the private sector. However, by mostly advocating for reductions in public sector employment as a fiscal balancing act during crises, the IMF fails to consider the broader social impact. While it’s undeniable that an excessively large public workforce can lead to inefficiencies, such as ghost employment and bloated bureaucracies, the opposite extreme of indiscriminate job cuts also poses severe risks. 

Diagnosis 4: Unraveling the complex nexus between IMF programming and governance pitfalls in MENA

The inherent nature of IMF loan agreements demands a deep engagement with local governance systems. However, insights from the Annual Meetings reveal a persistent trend– the Fund consistently neglects the nuanced specifics of these structures, deeming them a ‘sovereign issue’. This is an oversight that carries profound and far-reaching consequences.

While the IMF itself does not directly cause governance problems, its standardized approach to financial assistance can unintentionally magnify pre-existing challenges. This becomes clear when funds are allocated without a thorough and active examination of institutional weaknesses. Oversight of this sort becomes even more visible in the context of large-scale projects or funds. IFIs, including the World Bank and the IMF, have themselves noted that mega projects in some countries, despite their significant scale, often fail to make substantial contributions to development. As such, governments are failing to meet the developmental needs of countries, from health and education to social protection and physical infrastructure.

Such an evident failure of mega projects, therefore, can be directly linked to a recurring methodological flaw– the reluctance of the Fund to address the persistent issue of resource misallocation. This flaw is particularly perplexing given that the IMF, through its policy conditions and Article IV consultations in countries like Lebanon and Tunisia, expressly acknowledges the need for financial transparency and anti-corruption measures. Accordingly, this raises a crucial question: Is the IMF’s approach to combating issues like corruption sufficiently robust and effective in the region?

Not quite. One of the significant risks associated with such an approach is that it exposes IMF loan programs to the risk of political capture. In countries where institutional checks and balances are weak, the policy conditions set by the Fund can inadvertently strengthen the hold of certain groups or individuals in power. This situation often manifests when those in authority skew these conditions to benefit their interests, such as by implementing inadequate and regressive budgeting practices and promoting policies that exacerbate wealth disparities, a scenario observed in Lebanon for example. For instance, the conditioned bank restructuring was superficial, allowing the banking sector, closely tied to political elites, to evade acknowledging and addressing its significant financial losses. Moreover, the IMF’s push to reform – not abolish – the banking secrecy law when the agreement was initially signed led to a legislative response that continued to protect elite interests, facilitating tax evasion and financial corruption. These actions, influenced by IMF-set conditions but skewed by local power dynamics, continue to widen wealth disparities.

Lastly, while the IMF promotes itself as an apolitical actor, it has historically leveraged its role to further geopolitical interests. This may be best exemplified in the expedited approval of a $2 billion loan to Pakistan. If the loan were less politically motivated, it might have allowed for a more stringent evaluation of Pakistan’s internal issues, potentially leading the IMF to impose stricter anti-corruption measures or oversight as a condition for the loan. However, in such a case, such considerations might have been secondary, underscoring how political interests can sometimes override a more comprehensive approach to economic aid that includes tackling accountability, governance, and consequently, welfare.

The Way Forward: From lazy economics to inclusive economies

In summary, the IMF’s approach to the MENA region’s debt crisis needs a comprehensive overhaul. Simple economic formulas are insufficient and tend to worsen social disparities. To tackle debt injustice and governance issues effectively, a nuanced, gender-aware approach is necessary.

Moreover, fiscal strategies are crucial in resolving this crisis. Key measures include adopting progressive taxation systems, such as wealth taxes, to fund an equitable economy, diminish inequality, and generate revenue for easing the debt load. To assess the health of the economy more accurately, alternative indicators should be considered. This includes considering the Human Development Index (HDI), which provides insights into health, education, and living standards, ensuring that economic policies contribute to overall human well-being. Gendered indices are also crucial for highlighting gender-based disparities, which, when addressed, can lead to a more equitable and fully utilized workforce. Indeed, feminist economic analysis would underscore the necessity of considering gender-specific impacts when evaluating IMF programs. Such a methodology ensures that the costs of austerity, particularly in the realm of ‘invisible’ work executed by women, are not overlooked.

Instead of following a blanket policy to public sector employment, the IMF should adopt a specialized approach. Uncontrolled expansion and massive reduction in public sector employment can both have far-reaching negative implications. A strategic middle path is necessary and possible, one that carefully evaluates and addresses the specific needs and challenges of each country within the region.The ideal strategy should involve a collaborative effort between the IMF, local governments, regional economists, and civil society groups that work closely with marginalized groups, to realign the public sector workforce. This realignment should be both gender-aware and demand-driven, focusing on sectors that genuinely require expansion, such as healthcare, social protection, and education, to enhance service delivery and job allocation. Prior to any cuts to the workforce, providing adequate retraining and education opportunities is essential to ensure that employees are equipped for transitioning into more productive and relevant roles.

The IMF should advocate for and facilitate strategies that promote responsible and diversified private sector growth, moving beyond rentierism and wealth accumulation. To this end, it can push for tax incentives for investments in critical sectors including manufacturing, agriculture, technology, and sustainable energy. This approach would encourage firms to explore and invest in these vital areas. Furthermore, the provision of grants or low-interest loans to small and medium-sized enterprises (SMEs) in emerging industries can spur innovation and growth. Alongside these financial incentives, the creation of a regulatory framework that supports business innovation, minimizes bureaucratic barriers, and emphasizes transparency and accountability, is essential. 

Additionally, a pivotal aspect of addressing the debt crisis involves reducing reliance on external debt. This can be achieved through domestic resource mobilization and enhancing government efficiency. Improving domestic resource mobilization primarily involves refining tax revenue collection. Governments can achieve this by broadening the tax base, ensuring wealthy individuals and large corporations pay a fair share, and minimizing tax evasion and avoidance. 

Enhancing government efficiency is another critical element. This includes streamlining public sector processes, reducing bureaucratic red tape, and promoting transparency and accountability in government spending. Investing in sectors that have a high multiplier effect should also be given attention. These investments not only stimulate economic growth but also ensure long-term social and economic benefits. It is time for the IMF to go beyond lazy economics.

¹ AWC is a regional group of civil society organizations from the MENA region dedicated to watching and influencing the operations of International Financial Institutions (IFIs) in the region to make sure that the development processes are just, inclusive, participatory, and sustainable.

² Gross Domestic Product (GDP) is the total monetary value of all goods and services produced within a country’s borders over a specific period, including consumption, investment, and government outlays. Exports refer to the total amount of goods and services a country sells to other countries.

³ Yemen’s lower debt service rate as a proportion of government expenditure is influenced by its status as a low-income country. Yemen receives significant international assistance, including substantial grants from the World Bank and debt service relief from the IMF​.

4 SDRs are a form of international money that is allocated to every member country of the IMF. They are reserve assets that are convertible to dollars and other hard currencies.They are distributed without conditions and are a cost-free asset that is synonymous with general budget support.

Written by Hussein Cheaito

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