IMF intervention: Lessons from Asia and Latin America
Accounts of IMF intervention in Asia and Latin America in the 1990s
Courtesy: International Monetary Fund

On November 11, Egypt received the first installment of a three-year, US$12 billion International Monetary Fund loan, a move countries in Asia, Africa and Latin America know too well from their own experiences during economic crises throughout the 1990s.

Loans from the IMF are often associated with accompanying structural adjustment programs, which commonly focus on ensuring a country’s ability to repay the loans, encouraging trade and the capital flows and protecting multinational companies from potential nationalization.

Several developing countries have adopted IMF programs in the hope of attracting liquidity from international creditors that tend to follow advice from the IMF about the ability of certain nations to repay their debts.

East Asia in crisis

Several East Asian countries were hit with a financial crisis in 1997 that weakened them economically and politically, propelled by the sudden and massive outflow of foreign capital following interest rate hikes in the United States and the devaluation of the Thai currency.

The situation encouraged the IMF to intervene. Indonesia accepted IMF support, while Malaysia turned it down in a quest to pursue its national economic strategy, which contradicted the IMF’s conditions.

According to Indonesia’s letter of intent for loan approval in October 1997, the state promised to follow an austerity program, cutting the state budget, suspending large-scale infrastructure projects concerning roads, electricity, irrigation and energy, and removing all exemptions from the nation’s value added tax. The government also raised taxes on tobacco, alcohol, land and property, and pledged to gradually eliminate fuel subsidies and cancel price controls on some basic commodities.

Malaysia adopted opposite measures, raising government spending in an attempt to stimulate economic growth. According to Ross Buckley, in his academic paper assessing Malaysia’s response to the crisis, taking expansionary measures at the time encouraged local demand and boosted economic growth.

Like Indonesia and unlike Malaysia, Egypt sought to reduce its growing budget deficit through reductions in fuel and electricity subsidies and converting food subsidies to cash subsidies through ration cards. In addition, the government imposed new taxes on property and instigated value added taxes.

The Indonesian letter of intent shows that the government pledged not to lower interest rates too soon. Notably, interest rates in Indonesia recorded the highest level among Asian economies during the crisis, hitting 80 percent in August 1998, before easing to 60 percent the following month, according to an IMF paper. Indonesia had floated its currency following the devaluation of the Thai baht, and by January 1998 the Indonesian rupiah had plunged by 229 percent, according to Eric Toussaint in his book, Your Money or Your Life: The Tyranny of Global Finance.

Malaysia conversely devalued the currency before pegging the Malaysian ringgit to the dollar for seven years, banning speculation outside the country. This helped the nation to avoid an overvaluation of its currency, as the ringgit was undervalued, which boosted the country’s exports, according to Buckley.

Following the same path as Indonesia, Egypt liberalized its exchange rate and raised its interest rates, but unlike Asian economies, Egypt suffers from a trade deficit, which means that a lower value of the currency has inflationary percussions.

The Indonesian government also abandoned the banks in crisis and restructured the financial sector. In November 1997, when the government had to let 16 banks fail, a state of panic spread among the population, according to Toussaint.

Malaysia, instead, imposed capital controls to protect the financial sector from capital flight while proposing to buy the sector’s bad debt and recapitalise financial institutions, as well as merge struggling banks.

Egypt’s financial sector is in a more favorable position, benefiting from the economic measures taken by the government, as the hike in interest rates reflected on the large amount of sovereign debt held by the banks, according to a report by international credit agency Moody’s.

The letter of intent submitted by Indonesia also indicated that the country eased business conditions to attract foreign investors and privatization of public sector companies. In order to balance the rigid measures, the government pledged in the letter of intent to develop a cash subsidy scheme and target the most needy.  

On November 5, 1997, the IMF approved a US$10.14 billion loan to Indonesia over three years, in addition to US$8 billion from the Asian Bank for Development and the World Bank. By the end of 1998, the total debt service percentage of the country’s GDP doubled to 20.3 percent from 9.4 percent in 1997.

The conditions stated in the letter of intent were approved by IMF representatives in advance and were shielded from public scrutiny, according to Ernst Wolff in his book Pillaging the World: The History and Politics of the IMF. Wolf added that there were allegations that the proposed measures were not imposed by the Fund, but by the officials of concerned countries.

The drop in the exchange rate amid the absence of regulation from the Indonesian Central Bank resulted in a surge in the ratio of foreign bank debt to gross domestic product (GDP) to 140 percent in 1999 from around 35 percent before the crisis, according to University of Columbia’s Policy Dialogue.  The liquidation of the 16 failed banks was a condition in the IMF agreement, sparking a massive rush by depositors fearing that their money would not be guaranteed, said the website.

The population subject to these economic measures then suffered from the implications of devaluation and loss of half of their purchasing power. They subsequently went into a struggle to survive, said Wolff.

The number of poor people in Indonesia surged to 49.5 million individuals in 1998, up from 34.5 million the previous year, indicating the impoverishment of 15 million Indonesians, according to official data published by the World Bank.

People also had to live with a massive rise in prices, whereby inflation rates accelerated to 58 percent in 1998 compared to 5.3 percent in Malaysia in the same year, while unemployment increased to 5.5 percent in Indonesia, compared with a stable rate in Malaysia at 3.2 percent in 1998, World Bank data shows.

This year also saw a popular uprising topple Indonesia’s longtime autocrat Muhammad Suharto.

In 1999, Indonesia’s economy was almost stagnant with a 0.2 percent growth rate, much slower than Malaysia, which had a 5.4 percent growth rate. In the year prior to the crisis, the Indonesian economy grew by 8 percent before slowing to 4.5 percent in 1997, contracting by more than 13 percent in 1998. Malaysia’s economy, on the other hand, grew by 10 percent in the year prior to the crisis before slowing to 7.5 percent in 1997 and shrinking by 7.5 percent in 1998.

Latin America in crisis

The Asian crisis contagion soon spread around the world to infect weak economies, including  those of Latin American countries where investors fled, leaving the Brazilian currency in crisis. This had negative implications for other Latin American economies that traded with Brazil and competed in world trade, especially Argentina.

In early 1999, both Brazil and Argentina resorted to the IMF for urgent liquidity and to encourage the global business community to return. The loans, as usual, were conditioned by structural adjustment programs that included fiscal consolidation, tightening monetary policy, economic restructuring programs, privatization and opening up markets for foreign investors.

But these were not the first loans both countries had taken from the IMF.

The two countries had already undertaken economic restructuring and austerity programs prior to the 1999 crisis. When Brazil went into crisis in the early 1980s, it resorted to the IMF as well. On IMF involvement in Brazil and Mexico in the 1980s, Wolff said that the fund’s only objectives were to ensure the two nations could maintain regular repayments of loans and improve business conditions for investors and profit opportunities for large foreign projects and banks.

As for Argentina, in the 1990s, the country took out four loans from the IMF and subsequently adopted restructuring programs, deregulated the market, expanded privatization — especially in the oil, communication and power sectors — and reduced tariffs, which sank the country in debt.

Following the 1999 crisis, the IMF approved a US$18.1 billion loan to Brazil, which at first sought to defend its currency with the financial support package but with the level of capital flight, soon failed in its efforts. In January 1999, Brazil abandoned its currency peg to the dollar and devalued the real by 50 percent in a short period.

As a result, Argentina, a third of whose exports go to Brazil, saw a decline in exports after they became more expensive for Brazilians. Moreover, Brazil’s products now competed with Argentina in world trade and became cheaper inside Argentina itself, according to Wolff.

By the end of 1999, the Argentine economy was suffering from stagnation, high external public debt standing at US$114 billion, and rising interest rates while the country sank into even more debt, according to Wolff. At the time, the IMF offered the state a fifth loan on the condition that it reduces public spending. This involved cutting social protection schemes at a time when 14 million of Argentina’s population of 36 million were living under the poverty threshold, Wolff added.

In October 1999, Fernando de la Rúa came to power in Argentina and cut spending by US$1.4 billion and raised taxes by US$2 billion. In 2000, the IMF approved the new loan worth US$7.2 billion. In the aftermath of these policies, strikes, protests and other forms of demonstrations became a regular occurrence in Argentina. However, despite the political and social turmoil, the government announced yet another budget cut worth US$1.6 billion and, pressured by political instability, the government raised interest rates by more than 50 percent. By the end of 2001, production had dropped by around 25 percent, thousands of businesses went bankrupt, and a sixth of the labor force became unemployed, according to Wolff. The government also offered a risk premium worth 40 percent, in addition to interest rates for its creditors.

Wolff added that the government announced further budget cuts that it could not actually undergo, leading to a threat from the IMF that it would stop its disbursements of the loan. In an attempt to prevent subsequent capital flights, the government imposed caps on withdrawals at US$250 starting December 1, which mainly affected small depositors at a time when investors and speculators managed to transfer more than US$15 billion outside the country.

At this point, the IMF stopped assisting Argentina, and the government faced general strikes across the country after announcing a reduction of 18 percent of its total spending. The ongoing public demonstrations led to the ouster of de la Rúa at the end of 2001. A few days later, the new transitional president Adolfo Rodríguez Saá declared the world’s largest debt default as Argentina failed to repay US$132 billion of debt.

In the meantime, Brazil was in a more favorable condition. Although Latin America’s largest country followed the Fund’s program, its people soon brought worker’s party Luiz Inacio Lula da Silva to power, whose election primarily caused market jitters, but soon calmed down after he declared his commitment to existing agreements and to market policies.

However, although Da Silva maintained government spending levels without seeking any hikes in public expenditure, he sought to ensure that the poor benefit the most by introducing the well-known cash subsidy program Bolsa Familia. The program ultimately induced local demand and helped stimulate the economy. Soon, however,  in efforts to gain more independence in setting government economic policy, Brazil paid off its debt to the IMF two years ahead of schedule.

According to World Bank data, the unemployment rate in Brazil remained stable at around 9 percent during the crisis years while it surged to 18 percent in Argentina in 2001, up from 12.8 percent in 1998 prior to the crisis. Brazil also managed to avoid a shrinking economy in the years of the crisis despite stagnating for two years, with growth levels below 1 percent. Brazil soon returned to growth with a 4 percent rate in 2000, while Argentina’s economy kept shrinking for four consecutive years until 2002, when it shrank by 10.9 percent.


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