[stop-imf] IMF's critics on Argentina echo Asian experience

[Robert Weissman]

IMF's critics on Argentina echo Asian experience

By Richard Hubbard

SINGAPORE - Reuters, Jan. 6, 2002 - Argentina's financial crisis has
triggered a familiar round of criticism of the International Monetary Fund
(IMF) last heard during the Asian crisis of 1997-98 when the Fund
ultimately accepted it had some justification.

Once again it is the harshness of the IMF's conditions on its bailout
loans, in terms of fiscal austerity and monetary policy tightness, that
are at the
forefront.

In the case of Argentina these are compounded by a criticism of the Fund's
failure to halt lending when it became clear debt default and currency
devaluation were inevitable.

"The key to the problem is growth. They (the IMF) realise its importance
too late," said Steve Brice, Treasury economist at Standard Chartered Bank.

Brice argues that in Argentina's case a powerful combination of fiscal
austerity, tight monetary policy imposed by capital outflows and a rigid
exchange rate system in a country trying to grow itself out of debt was
simply unsustainable.

"Running externally-financed fiscal and current account deficits,
accumulating a very large external debt with the concomitant burden of
servicing it and, topping it all, sustaining a pegged currency, are truly
lethal combinations," noted Andrew Freris, chief Asia-Pacific economist for

fixed income and treasury at BNP Paribas.

ASIA'S EXPERIENCE DIFFERENT

In Asia at the end of 1997 it was excessive fiscal and monetary policy
tightness in the crisis hit countries of Thailand, Korea and Indonesia,
which was at the heart of much of the criticism of the Fund's actions.

A critique the Fund itself has accepted.

"They always criticise us," said Kunio Saito, Asia Pacific director of the
International Monetary Fund.

"But we acknowledged that we could have done better in certain aspects,
particularly with respect to fiscal policy," Saito told Reuters in a
telephone interview from Tokyo.

Saito agrees that at the start of the Asian financial crisis the Fund
underestimated the severity of the recession to come when it imposed its
early conditionality for the massive bailout packages needed.

"We initially came out with too tight a fiscal policy, but in due course we
changed our tack," Saito said.

"The IMF dealt with this criticism, we learnt lessons and adjusted our
programmes appropriately," he said.

Unfortunately for many economists the Fund's performance in Argentina looks
like the lessons learnt in Asia were too quickly forgotten. However, they
said this may in part be due to the very different set of circumstances.

The problem during the Asian financial crisis was weakness in the domestic
banking systems which lead to a massive outflow of short term capital. In
most cases Asian governments had track records of fiscal conservatism and
low public debt levels.

When the crisis hit the financial outflows, aggravated by rigid exchange
rate regimes, ultimately depleted each nation's foreign reserves.

IMF STRATEGY

The IMF's strategy was to stabilise the foreign exchange markets by
organising huge loan programmes. In the case of Korea the loan package
eventually totalled $58 billion, which was the largest in the IMF's
history.

The Fund then tightened monetary policy, ostensibly to stabilise the
currency, and imposed tough fiscal constraints.

The IMF's Saito argues the Fund did eventually come to realise that some
support on the demand side was necessary. But its critics would say that
realisation came too slowly.

However, in the case of Korea and Thailand, the IMF can look back its
experiences with some satisfaction.

On August 23, 2001 Korea completed repayment of all of its IMF loans under
the 1997 Stand-By Credit arrangement. Currently Thailand has also managed
to repay a substantial amount of its IMF loans.

Both countries are now in a post-programme monitoring phase.

INDONESIA STILL A PROBLEM

In Indonesia where the problems ultimately turned out to be more severe,
and where the IMF also faced a lot of criticism over its handling of the
closure of some domestic banks, the Fund's programme continues.

Analysts say it is in Indonesia that the comparisons with Argentina find
most relevance.

Indonesia is still running a fiscal deficit of about four percent of gross
domestic product, much of it externally financed, notes BNP Paribas'
Freris.

"Also Indonesia has a very large external debt."

Freris said in 2001 this debt amounted to US$133 billion or 89 percent of
GDP compared to Argentina's $146 billion or 55 percent of GDP.

"There is, however, a crucial difference in that the external debt service
ratio in Argentina is a crushing 92 percent, whereas in Indonesia this
ratio is a relatively light 26 percent."