ANALYSIS:Visiting parties just as interested as us in seeing a return to growth in Irish economy, wrties DONAL DONOVAN
THE COMING days and weeks will see much debate about the “measures” in the four-year plan and the coming budget, as well as the alleged role of the International Monetary Fund (IMF) in their formulation. But a separate set of issues also deserves discussion. How will the loans from the EU-IMF work in practice? When will the funds be disbursed? How soon will we have to pay them back? What happens if we can’t? Do countries ever not repay the IMF?
The IMF is supposed to provide temporary financing to help tide over a country while it is working its way out of a crisis. It is a fairly hard-nosed organisation – the funds it lends ultimately come from taxpayers – and safeguards are in place to try to ensure a country does not “take the money and run”.
The IMF funds (together with those from the EU) will be disbursed in instalments – typically quarterly – conditional upon adherence to a set of quantitative indicators. In Ireland’s case, these would probably refer to the path for the budget deficit. One or two major policy measures – for example, actions to be taken regarding the banks – might also be included. If these are met, the country will have automatic access to the funds.
If there are deviations from the set path, a so-called “waiver” would be required from the IMF’s executive board before agreeing to release the money (disbursal of the EU funds would probably be tied to release by the IMF). If these are minor and temporary in nature, a waiver would normally be granted quasi- automatically. Major deviations could emerge due to, for example, failure to implement measures as agreed, or a deterioration in the macroeconomic environment.
In this situation, discussions would first have to take place with the Irish authorities to agree on whatever extra measures might be needed to keep the programme more or less on track. This is not a mechanical exercise. The IMF is as prone as anyone else to errors in forecasting, so one would not expect there to be an insistence on slavish adherence to the original path. The idea is to keep moving in the right direction and at a pace that is reasonable and feasible as circumstances unfold. Nevertheless, some negotiating, even “haggling”, can be part of the process.
A question being asked right now is how will the programme be affected by a forthcoming election and very likely change in government? The IMF is well used to dealing with this type of situation. Ideally, one would prefer to wait until there is a new government with a full mandate to take ownership of the programme. But if time is short – as most likely it is right now – the IMF would probably be content to go ahead before an election, provided it is satisfied there is a broad commitment by the Opposition party leaders to follow the essential elements of the programme. This is greatly facilitated by the support already voiced by the Opposition for the budget deficit target of 3 per cent of gross domestic product by 2014. Further reassurances might be asked for – in the form of a public statement or even a letter to the head of the IMF – once the four-year plan and annual budget are announced.
Despite their call for an immediate election, this approach might suit the Opposition, as it would, to some extent, get them “off the hook” over bringing in unpopular measures. Nor would it constrain them unduly from “tweaking” elements of the plan to their liking as the programme unfolds – this would tend to happen anyway for the reasons given above.
What of the financial terms and conditions? The interest rate will likely average around 5 per cent. For an industrial country, repayment of the IMF funds would normally be required in instalments during a three- to five-year period. However, since the loan to Ireland will be the first since the joint EU-IMF rescue fund was set up formally (the Greek bailout was on an ad hoc basis), it cannot be ruled out that a more flexible repayment arrangement might be agreed.
The total amount of close to €100 billion is in the form of contingency funding, and it might not all end up being drawn down. This could be the case for the very sizeable component directed to the banks were the external financial environment to improve, and the banks were to start regaining normal market access. And we should not be too pessimistic. Such a scenario can happen. For example, most of the IMF loan to the UK in the mid-1970s was not used, as the fortunes of sterling took a rapid and unexpected turn for the better. But what happens if, despite the best efforts of all, we end up having difficulty settling the bill when it falls due? After all, three to five years is not that far away, and the amounts involved look enormous.
The Merkel proposal to require private creditors to take a hit could be in place by then, and this would ease pressure. Even so, we might not be fully out of the woods by 2014. In this case, it would not be at all uncommon for the IMF to offer a new loan, say for a one- or two-year period, to help bridge the gap. The downside is that we would remain under IMF “monitoring” during the period of the new loan.
Do countries ever not repay the IMF, and if so, what happens to them? There are only a few significant instances – about 10 or so in the fund’s 60-year history. They fall into two categories. A first group (for example, Liberia, Somalia, Sudan, Zaire and Zambia) are very poor African countries that received very large sums of IMF money in the 1970s and 1980s which they never had much chance of repaying. These loans reflected, in some cases, pressures from the US to provide financing for cold war allies. Second, there have been a few countries (Peru and Zimbabwe come to mind) which, for ideological/nationalistic reasons, told the IMF to basically “go stuff it”.
The period during which the countries were in arrears and on the IMF’s “black list” were very painful for them. It took many years – usually following major changes in leadership – to put in place schemes which usually involved refinancing and some write-off by the IMF to resolve the issue. Ireland is very far from the situation these countries faced.
The IMF is not a charitable body. To try to ensure it gets its money back it will link the disbursal of funds to policy performance, and can be expected to be flexible on financing arrangements should the going prove very tough for Ireland. But it is as much in their interest as in ours that the IMF sees the back of Dublin as soon as possible.
For this reason, and contrary to what is often asserted by critics, the IMF is just as keen as we are to see a return to growth for the Irish economy, and their policy proposals will keep this in mind. But it is recognised by virtually everyone that the compelling need for a return of financial stability will require some short-term growth sacrifice. The example of Ireland in the mid-1980s – when we were not far from IMF clutches – is just one of many showing that in a small open economy, rapid growth cannot be maintained for long in the presence of major fiscal imbalances. We are paying the price for the pursuit of an unsustainable growth strategy linked to fiscally irresponsible policies. This we would have to do with or without the IMF.
Donal Donovan was a staff member of the IMF from 1977 to 2005 before retiring as a deputy director. He is currently adjunct professor of economics at the University of Limerick, and a visiting lecturer at Trinity College Dublin.