What would you do if you woke one morning and saw that you were trapped in the closet with a dead man and a voice is telling you that you signed an agreement to remain there for the next two years? What would you do if you were the Government of Grenada trapped in the closet with the International Monetary Fund (IMF) for the next two years?
Writing in the Financial Times recently, former US Treasury Secretary Larry Summers described the Bretton Woods agreement – the agreement to establish the World Bank and IMF – as virtually dead.
Commenting on the combination of China’s effort to establish a major new institution and the failure of the US to persuade its traditional allies to stay out of it, Prof. Summers stated that this “may be remembered as the moment the US lost its role as the underwriter of the global economic system”.
The United Kingdom (UK) became the first Group of Seven (G-7) country to sign up as a founder member of the new China-led Asian Infrastructure Investment Bank (AIIB) in March 2015.
To stem the tide the IMF moved quickly to grant more than $1bn of assistance for two African economies, reaffirming its relevance and that of its sister institution the World Bank in providing financial support for developing countries.
According to a report in the Business Day recently, the US continues to block the urgently needed reform to the governance structure of the IMF and World Bank to better reflect the balance of forces in the global economy of today.
The new rival institutions now play a vital role in providing assistance to developing counties where the IMF used to be. China is at the forefront of the launching of the AIIB and the New Development Bank – known as the “Brics bank” – as it seeks to enhance its global economic influence.
The traditional IMF loans like the one that Grenada is locked into currently are the traditional IMF assistance for countries in distresscoming with conditions that must be met in terms of structural adjustment and reforms to economies.
IMF officials have stated bluntly that the skills possessed by their institution and its ability to bail out countries in return for austerity does not come overnight. For her part Christine Lagarde, the IMF MD, has offered to work with the new organisations and not against them.
According to Business Day, the establishment of these new banks is as much about politics as about economics, influence and assistance. They are to a significant extent a response to the dominance of the US and Europe in the Bretton Woods institutions, and the refusal of the US to give the go-ahead for long overdue changes. Reforming them is becoming ever more urgent.
In briefing the South African Parliament recently, Treasury Director General Lungisa Fuzile stated that it would be preferable for member states to use their own contingent reserves for short-term balance of payments difficulties rather than rely on the IMF.
Barbadian Prime Minister Freundel Stuart disagrees with the IMF assessment of the Barbadian economy. The IMF recently placed Barbados at the bottom of economic performance in the Caribbean based on its measure of economic growth.
According to Stuart although his country faces economic challenges, going to the IMF was not the correct thing to do. He points to Jamaica where after several decades of IMF medication the economic challenges remain.
Stuart insist that the IMF must find solutions to economic problems faced by Caribbean countries who import more than they export due to lack of a competitive basis.
Unfortunately Grenada is already locked in the closet with the carcass of the IMF for at least the next two years obtaining a scrawny US$2.7M every six months as a reward for the increasing hardship placed on the backs of the people.