IMF goofed up in Argentina: Montek

Evaluator's report holds lessons for India.

The International Monetary Fund’s Independent Evaluation Office has said the IMF had goofed up in Argentina, a country in which it has been involved more or less continuously.

The Independent Evaluator, Montek Singh Ahluwalia, now deputy chairman of the Planning Commission, has said the “IMF surveillance failed to highlight the growing vulnerabilities in the authority’s choice of policies and the IMF erred by supporting inadequate policies too long”.

Ahluwalia says while the Fund was correct in recognising that fiscal discipline and structural reforms were essential, it underestimated just how unsustainable the country’s level of debt was. Indeed, the IMF kept granting waivers (the report doesn’t attribute political motives to this) when Argentina failed to comply with conditions.

By the late 1990s, the report says, the IMF erred by supporting the country’s weak policies even though it was clear by then that the country didn’t have the political will to make structural changes.

By mid-2001, it was quite clear the strategy of keeping a fixed exchange rate and a high public debt was not a sustainable one, but the IMF didn’t force Argentina to make a fundamental change in policy.

Had the IMF got the country to move to a convertible currency earlier, the report says, the pain would have been less because “Argentina’s economic health would have deteriorated that much less and more resources would have been available to moderate the inevitably painful transition process.”

While Ahluwalia’s report would be seen by many, such as the Left parties in India, as evidence that IMF policies don’t work, the Independent Evaluator’s report actually makes a strong case for being a lot more alert in areas like deterioration in fiscal balances and public debt, and in maintaining a correct exchange rate.

If anything, Ahluwalia’s central point is that the IMF was too lenient with Argentina and intellectually lazy, perhaps due to a cosy relationship with the government.

“Little attention”, the report says, was paid to the risks of giving the authorities the benefit of the doubt beyond the point where sustainability was clearly in question.”

The IMF’s surveillance, the Independent Evaluator’s report concludes, needs to be beefed up by making “medium-term exchange rate and debt sustainability the core focus.”

The IMF, says Ahluwalia, should in fact make it very clear that its support is conditional upon certain policy changes.

While Argentina is accused of having a weak political system that forces the government to make more expenditure, a weak tax administration and the use of spending as an instrument of political favour are something that applies to India as well.

In the event, Ahluwalia recommends the IMF adopt a stop-loss strategy to determine whether an existing policy prescription needs to be given up.

His report says that by 1999 itself the IMF’s staff had begun thinking about whether the fixed peg exchange rate was working but never got around to discussing this with the government.

The IMF, on the contrary, thought the 2001 crisis was a liquidity crisis and that debt and the exchange rate were manageable.