Commentaries
Understanding the IMF/World Bank Policies in Africa
By
Oct 24, 2008, 08:34

Over the last several hundred years, Africa has been deprived of the peace that it so desperately needs.  For over 400 years, Africa was subjected to the harsh trans-Atlantic slave trade.  Europeans and Americans brutally uprooted millions of Africans and shipped them away.  Torn away from their homes, Africans were inhumanely exploited for their labor.  The slave trade had a devastating affect not only on those involved, but also on future generations to come.  The exploitation of Africans continued even after slavery was abolished.

 A new form of slavery disguised as colonialism quickly took form as an institutionalized method of exploiting Africans.  European countries quickly staked their claims to different parts of Africa.  Over the course of about 90 years, Africa was subjected to colonial torture in the form of exploitation of natural resources, forced labour, terrorism, expropriation, unfair taxation, and genocide.  After the end of colonialism, European nations and the U.S. developed a new method of exploiting Africa.  The same countries that were victims of colonialism are now victims of debt.  Commonly referred to as the “debt trap” in the international community, the debt crisis in Africa is quickly becoming a major hindrance to the economic development of the region.  The external debt in Sub-Saharan Africa is estimated to be around $230 billion.  The World Bank in the late 1990s categorized 33 of the region’s 50 countries as heavily indebted poor countries. 

The IMF and World Bank

The IMF is an international organization comprised about 184 member countries.  It was established with the goal in mind of promoting international monetary cooperation in order to stimulate economic growth and provide temporary financial assistance to countries to help alleviate problems associated with debt.  Acting as the central institution of the international monetary system, the IMF’s main objective is to prevent crises in the system by advising countries to implement reliable economic policies.  It also provides funds that can be tapped by member countries that are in need of temporary financial assistance.

The IMF's statutory purposes include promoting the balanced expansion of world trade, the stability of exchange rates, the avoidance of competitive currency devaluations, and the orderly correction of a country's balance of payments problems.  The IMF also helps to promote economic growth and poverty reduction in countries that are at risk of being left behind by globalization.  In order to accomplish these objectives, the IMF has introduced reforms aimed at strengthening the framework of the international monetary system.            

The 184 member countries are accountable for the decisions made by the IMF. All member countries are represented by the Board of Governors, which is the highest authority governing the IMF.  The Executive Board is comprised 24 Executive Directors with the Managing Director acting as chairman.  The voting system that the IMF uses is based on a weighed system.  Countries with larger economies are given more voting power. The IMF lends foreign exchange to countries with balance of payments problems (IMF).  IMF loans are intended to ease the adjustment that a country has to make to bring its spending in line with its income in order to correct its balance of payments problem. 

IMF lending is also intending to support policies such as structural reforms in order to promote a country’s financial situation.  The IMF’s lending policy: “The IMF is not an aid agency or a development bank. It lends to help its members tackle balance of payments problems and restore sustainable economic growth. The foreign exchange provided, the limits on which are set in relation to a member's quota in the IMF, is deposited with the country's central bank to supplement its international reserves and thus to give general balance of payments support.

Unlike the loans of development agencies, IMF funds are not provided to finance particular projects or activities.  IMF lending is conditional on policies: the borrowing country must adopt policies that promise to correct its balance of payments problem. The conditionality associated with IMF lending helps to ensure that by borrowing from the IMF, a country does not just postpone hard choices and accumulate more debt, but is able to strengthen its economy and repay the loan. The country and the IMF must agree on the economic policy actions that are needed” (IMF).

While the IMF’s primary focus is on macroeconomic performance, the World Bank is concerned with longer-term development and poverty reduction issues.  The World Bank is not a “bank” in the common sense.  It is a specialized agency under the Untied Nations comprised of 184 member countries.  Member countries are responsible for financing and distributing funds under the World Bank.  The “World Bank” is the name given to the two organizations that comprise it, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).  These two organizations provide developing countries with interest-free credit, grants, and low-interest loans. 

Interest-free credit and grant financing is made available by the IDA, the world’s largest source of confessional assistance. In addition to IBRD and IDA, three other organizations make up the World Bank Group. The International Finance Corporation (IFC) promotes private sector investment by supporting high-risk sectors and countries. The Multilateral Investment Guarantee Agency (MIGA) provides political risk insurance (guarantees) to investors in and lenders to developing countries. And the International Centre for Settlement of Investment Disputes (ICSID) settles investment disputes between foreign investors and their host countries (World Bank).     

How the World Bank and IMF Define their Role in Africa

As a result of the declining market prices for export commodities in the 1980s, international interest rates rose and many African countries soon became burdened with debt.  African countries turned to the World Bank and IMF for financial assistance. The World Bank and the IMF provided these countries with loans to pay off their debt.  Over the years, the World Bank has become the largest provider of development assistance to Africa.  The World Bank developed a strategic plan that is consistent with the goals outlined by African heads of state in the New Partnership for Africa’s Development (NEPAD). 

At the request of NEPAD, the World Bank agreed to support the pan-African initiative in a number of specific areas:  infrastructure, agriculture, regional trade facilitation, health, nutrition, population, education, community-driven development, and capital flow (World Bank).  In 2003, the IBRD committed $15 million for 1 project.  In the same year, the IDA committed $3.7 billion in support of 60 projects (World Bank). The World Bank has adopted a policy of developing human resources in order to reduce poverty in Africa.  The Bank aims to accomplish this goal through better access to education and health services and through social protection interventions to help vulnerable groups.  In response to the public health in Africa, The World Bank has approved $1 billion over time to fight HIV/AIDS in Africa and remains the region’s leading financier of HIV/AIDS programs.  The Bank is also actively involved in education projects in Africa. 

The IMF has worked jointly with the World Bank in forming policies.  While the World Bank is concerned mainly with long-term development, the IMF provides financing for general support of a country’s balance of payments.  The IMF provides African countries with advice on macroeconomic policies.  The IMF also acts as a catalyst for other financing.  By adopting IMF policies, countries in Africa are letting the world know that they are adopting economic policies that are deemed sound by the IMF.  This program generally requires countries to adopt the following policies: 

Reductions in government spending;

·        Monetary tightening (high interest rates and/or reduced access to credit;

·        Elimination of government subsidies for food and other items of popular consumption;

·        Privatization of enterprises previously owned or operated by the government; and

·        Reductions in barriers to trade, as well as to foreign investment and ownership

The policies implemented by the World Bank and the IMF in Africa have spurred criticism from developing countries in Africa as well as from development organizations.

Result of IMF/World Bank in Africa

Much of the debt that has accumulated over the past decades stem from reckless lending from international organizations to undemocratic corrupt governments.  A substantial amount of funds borrowed from international lending agencies have been diverted to the personal bank accounts of high government officials.  The IMF and World Bank have faced increased criticism over the past several years due to their policies in Africa.  Although the IMF and World Bank both claim that African countries have improved under their policies, the numbers reveal a different story. 

According to the U.N. Conference on Trade and Development (UNCTAD), economic conditions imposed by the IMF and World Bank were the dominant influence on economic policy in the two decades to 2000, a period in which Africa’s income per head fell by 10% and income of the poorest of the people fell by 2% per year (global issues).  Instead of helping to increase living standards in African countries, the IMF has increased the external debt burden of these countries.  Most of the countries in Africa that joined the IMF qualified for the ESAF.  The structural adjustments that the ESAF requires are being criticized from actually making the external debt crisis worse.

Structural adjustment refers to a package of economic policy changes designed to fix imbalances in trade and government budgets. In trade, the objective is to improve a country's balance of payments, by increasing exports and reducing imports. For budgets, the objective is to increase government income and to reduce expenses. In theory, achieving these goals will enable a country to recover macroeconomic stability in the short-term. It will also set the stage for long-term growth and development.  However, stability and long-term growth were not even beginning to formulate in Africa. 

In response to demands from the international community for a solution to the external debt crisis in poor African countries, the IMF and World Bank introduced the Highly Indebted Poor Countries (HIPC) initiative in September 1996.  The HIPC was designed with the intent of providing debt relief to countries with the greatest need.  However, the HIPC program requires countries to adopt structural adjustments under the ESAF.  The little debt relief that the HIPC provides has been criticized as being provided slowly.  Being linked to IMF structural policies, the HIPC program would actually do more harm than good. 

Along with providing African countries with advice on economic policies, the IMF introduces reforms to countries that borrow from the fund.  In order to receive funds, a country must first agree to reform policies advocated by the IMF.  This arrangement gives the IMF a substantial amount of power dictate economic policy.  Although prospective borrowers are made aware of the conditions beforehand, poor African countries are faced with little choice but to comply.  Many of the international lenders defer to the IMF seal of approval when countries request loans.  Disapproval by the IMF of a country’s economic policies can lead to a denial of public and private international credit and development aid. 

In African countries participating in ESAF, the amount of total external debt rose significantly between 1988 and 1996.  The HIPC initiative has proved to be a slow process.  Under the initiative, a country must pursue structural adjustments for three years in order to reach the “decision point,” when donors agree to reduce its debt to “sustainable” levels.  As evidence of the slow process, since its implementation in 1996, only four African countries had reached the decision point in 1999.  Only Uganda, Ghana, Sierra Leone and a few other countries had reached the completion point and actually received funds.This clearly calls for a change in the course of IMF/World Bank policies in Africa.