Thursday, October 8, 2009

IMF, World Bank Revise Loan Conditions To Support Eastern Europe Through Crisis

Russia said this week that it will not disburse the last $500 million tranche of a stabilization loan to Belarus and that it will not grant a $5 billion loan to Ukraine.

Speaking in Istanbul at the start of the annual International Monetary Fund (IMF) and World Bank meetings, Russian Finance Minister Aleksei Kudrin said the Kremlin needs to carefully assess whether loans to Belarus and Ukraine would ever be paid back.

The announcement has focused renewed attention on the loan conditions of international financial institutions that are sending billions of dollars to Belarus, Ukraine, and other troubled Eastern European economies.

Over the past several years -- spurred in particular by the global economic crisis -- those conditions have been revised. There are now fewer, but more focused conditions that recipient countries must meet to receive the financing.

Critics are asking why the IMF, the World Bank, and other institutions continue to make loans to countries that are seen by Moscow as too risky.

But senior officials at the IMF and the World Bank say there is nothing wrong with their loan criteria.

They point to an internal IMF study that concludes that the easing of loan conditions since last year has helped Eastern and Central European governments to weather the global financial downturn -- and to even stave off systemic crisis across the region.

Some countries have gotten billions of dollars in IMF loans, while others have received hundreds of millions of dollars in credits during the past year. Recipients include Ukraine, Belarus, Georgia, Romania, Armenia, Hungary, Serbia, Bosnia-Herzegovina, and Latvia.

No Longer Dictating Terms

"Conditionality is different now than in the past, in that it is more focused," says Lorenzo Giorgianni, a division chief in the IMF's department of strategy, policy and review.

Giorgianni says that while there are fewer conditions, those conditions are "attached to areas that are important to ensure the success of the program -- typically, the financial sector and the fiscal framework."

He adds that the "reform consists effectively in the elimination of what were called 'structural performance criteria' before. And now, structural reforms are judged in the broader context of the performance of the programs. And they are not used to block any particular tranche of the loans."

Indermit Gill, the World Bank's chief economist on Europe and Central Asia, says that the bank is also no longer dictating the kind of reforms that governments in the region must undertake in order to receive emergency loans.

"We used to have something called 'structural adjustment loans,'" Gill explains. "We would sit down with a government and we would work out a program with them about what kind of structural reforms they needed to make. It was something that we agreed on with the government. And then, we would essentially provide support for those reforms."

"What we've done now," Gill continues, "is not the same kind of conditionality in the sense that we say, 'You'd better do this or else.' We actually disburse the money once the government has completed actions that are in their own development programs."

Not Repeating Asian Crisis

In the past, the IMF and the World Bank faced criticism for demanding too many reforms as a condition for emergency loans -- often requiring countries to reduce their budget deficits and make structural adjustments, like privatizing major industries and liberalizing their markets.

In the Asian crisis a decade ago, some blamed the reform demands from institutions like the IMF and the World Bank for making economic conditions worse.

Reza Moghadam, director of the IMF's department of strategy, policy, and review, says those kinds of criticisms were considered when the IMF revised its loan conditions. He says he hopes the new conditions give governments more "ownership" of their reform programs.

Moghadam says that IMF wanted to "make sure that we could hear not only words, but something that in a very, very severe economic crisis worldwide would be able to gain traction with the authorities of the countries -- and that would also be effective.

"Ultimately, it is a balance between focus and getting reforms done that will help the countries come back through the crisis."

Staying On Track

The IMF says all Central and Eastern European countries are on track so far -- having passed their last review and received their latest loan tranches.

IMF support loans to Eastern and Central Europe are complemented by financing from the World Bank, the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD), the European Commission, and other key European institutions.

The World Bank, EBRD, and EIB have committed more than $20 billion in support aimed at supporting the banking and financial sectors of the region. More than $15 billion has already been disbursed.

Those institutions also are taking credit for helping to stave off a systemic crisis in the region. But they also are warning against complacency in the face of economic challenges that lie ahead.

By Ron Synovitz. Published on 7 October 2009
Copyright (c) 2009. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty
The views expressed in this article are the author's own and do not necessarily reflect those of S & D.


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