IMF Conditions Harmful to Vulnerable Eastern European Economies

The International Monetary Fund (IMF) has tied pro-cyclical,
contractionary economic conditions on Eastern European countries to
sorely needed loans, a new report from the Center for Economic and Policy Research (CEPR)
finds. The report, "The IMF's Stand-by Arrangements and the Economic
Downturn in Eastern Europe: The Cases of Hungary, Latvia, and Ukraine,"
by Jose Antonio Cordero, closely examines IMF agreements with three
countries, Hungary, Latvia, and Ukraine, and finds that in all three
countries there were mistakes in economic policy that increased their
vulnerability to the external shocks. The governments' responses to the
downturn, along with IMF conditions for assistance, are also seen to
have caused harm with pro-cyclical policies.

"Despite its claims to the contrary, the Fund continues to push
pro-cyclical policies on countries badly bruised by the global
recession," CEPR Co-Director Mark Weisbrot
said. "In Central and Eastern Europe, it looks increasingly like a big
chunk of the IMF's new money will be a transfer from taxpayers to bail
out western European banks who made imprudent loans in the East."

Last week the European Union appropriated $175 billion for the IMF,
surpassing last month's $108 billion contribution from the U.S.
Congress in June.

In Latvia, a combination of pro-cyclical fiscal and monetary policy -
supported by an IMF agreement as well as funds from the European Union
- appears to have worsened the contraction following a large reversal
of capital after a boom fueled by foreign credit. The decision by the
Latvian government, in conjunction with the EU and the IMF, to maintain
Latvia's pegged exchange rate with Euro, has made recovery much more
difficult, since with the currency fixed, the only way to reduce the
country's current account imbalance is through shrinking the economy,
which reduces imports faster than exports and may also reduce real
wages. The Latvian economy will contract by as much as 18 percent this
year by some estimates (much deeper than the IMF's projection in
January 2009 of -5 percent).

In Hungary, the IMF standby arrangement included measures to bring the
government deficit, as a percent of GDP, down to 3.4 in 2008, and to
2.5 in 2009, even though Hungary is now projected to undergo a sharp
economic contraction of negative 6.7 percent of GDP. This pro-cyclical
fiscal policy has also been accompanied by pro-cyclical monetary
policy. The Fund's forecasts also indicate that it did not anticipate
the severity of Hungary's contraction, with its July 2007 projection of
just -1.0 percent growth for 2009. About a year before the crisis in
Hungary's financial sector, the IMF wrote in its report on Hungary's
economy that "the financial sector remains sound."

Ukraine was also hard hit by the world slowdown, through a sharp
decline in the price of steel (a major export); and on the import side,
a significant increase in the price of natural gas from Russia. Ukraine
also suffered from a reversal of capital flows, threatening liquidity
in the banking system, and from October 2008 to March 2009 the National
Bank of Ukraine lost US$14 billion in reserves. Yet the Fund also
prescribed fiscal tightening for Ukraine, where GDP is now projected to
decline by 9 percent in 2009. The IMF Standby Arrangement approved in
October 2008 provided for a zero fiscal balance, later relaxed to a
deficit of 4.0 percent of GDP. Ukraine's total public debt is low -
just 10.6 percent of GDP, so it would make sense to borrow in order to
finance an expansionary fiscal policy and reduce the severity of the
recession. It is worth noting that the Fund also greatly
underestimated the depth of Ukraine's recession, with its December 2008
forecast of a decline of -3.0 percent of GDP for 2009. Ukraine has also
pursued a pro-cyclical (contractionary) monetary policy under the IMF
agreement.