The Vicious Cycle of IMF Conditions in Sierra Leone and Malawi
Donors link their aid disbursements to the International Monetary Fund’s (IMF) rating of the recipient government. These ratings are based on factors like inflation rates, national debt loads, and other economic indicators. Many economists and several studies have asserted that the IMF’s rating system creates undue restrictions that are not necessary for long-term economic stability. In spite of this evidence, if the IMF feels that inflation might rise beyond five percent or that a nation’s debt load might grow, it will ask the national government to restrict public spending as a condition of receiving a positive rating.
In Sierra Leone, the IMF demanded that Sierra Leone set limits on public spending in order to avoid inflation. Donor nations then refused to disperse funding to Sierra Leone until it could achieve a favourable rating from the IMF. When the donors denied the Sierra Leone the payments they had promised, the country’s fiscal deficit grew, putting the country further off track with the IMF’s standards.
In 2007, the European Commission, World Bank and the British aid agency froze their budget support payments to Sierra Leone after the IMF sounded alarms. The government of Sierra Leone was forced to operate on a cash budget, meaning that very little funding was left to fight poverty in a country that is less than a decade out of civil war.
Fortunately, donors were alarmed by this. A joint paper by the government of Sierra Leone and four donors expressed concern about the impact of the IMF conditions on the essential work they had funded and expressed deep concern about the security implications of having this type of funding disruption of essential services prior to an election. The donors ended by calling for a review of the feasibility of IMF targets.
A similar lesson was learned in Malawi in 2001. The government’s lack of fiscal discipline took Malawi off track with the IMF, resulting in the suspension of payments for essential services. Malawi’s government was then forced to borrow more money to keep these services going, a non-negotiable point the country with the continent’s highest incidence of HIV & AIDS. These new loans took Malawi’s government farther off-track with the IMF.
ActionAid is working to educate parliamentarians and civil society leaders in Malawi, Sierra Leone and Kenya about the impact of the IMF’s conditionalities. By providing macro-economic literacy training, ActionAid is giving these leaders the tools they need to negotiate better aid and loan packages – and putting control of their national budgets back into their hands.
