Tag Archives: International Monetary Fund

The IMF’s (Non-)Engagement with Corruption in Military Spending

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In a move that has been hailed by the anticorruption community as a “major step forward,” the International Monetary Fund (IMF) has declared that it will address corruption in its member states, insofar as that corruption is “macro-critical” – that is, when corruption “affects, or has the potential to affect, domestic or external [macroeconomic] stability.” As I stressed in a previous post, the focus on “macro-criticality” is the IMF’s solution to a persistent problem with how to distinguish economic policy (which the IMF may influence) from matters that are outside the IMF’s mandate—because, after all, the IMF is a “monetary agency, not a development agency.” Grounding anticorruption in the Fund’s mission to support the international financial system allows IMF staff to discuss anticorruption strategies frankly with country authorities.

Yet certain corruption-related topics still seem off limits, notwithstanding their arguably macro-critical characteristics. For instance, although the IMF has touted its comprehensive framework for reviewing corruption risks, the IMF’s strategy leaves out certain key channels that facilitate corruption, such as the corrosive effect of corruption on, and in, military spending. The wholesale omission of military spending from the IMF’s anticorruption strategy demonstrates that the IMF’s attention to macro-critical corruption problems is tempered by understandable concerns about the reputational blowback that might result from intervention into politically sensitive areas. Understandable as it may be, the IMF’s decision to exclude military spending from its anticorruption strategy deprives member countries of the broader benefits that are provided when the IMF acknowledges a concern as macro-critical.

Understandable as it may be, the IMF’s decision to exclude military spending from its anticorruption strategy deprives member countries of the broader benefits that are provided when the IMF acknowledges a concern as macro-critical.

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A Covid-19 Checkup: How the IMF’s Transparency Measures Have Fared So Far

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With a trillion dollars in lending capability, the International Monetary Fund (IMF) is one of the best-equipped institutions to deal with the Covid-19 public health and financial crisis. Since March, the IMF has met an “unprecedented number of calls for emergency financing” with “unprecedented speed and magnitude,” through renegotiations of rapid credit facilities, refinancing initiatives, and debt relief assistance for more than 100 countries, totaling over $100 billion in disbursements so far. In the early days of the pandemic, there was a great deal of concern among anticorruption advocates over the way these emergency funds would be monitored (see collections of pieces here and here). The IMF’s initial approach generally did not impose formal transparency or governance requirements as a condition for receiving emergency Covid relief funds. Rather, the IMF chose to rely more on after-the-fact safeguards: recipient countries were told to spend as needed but to “keep the receipts.”

The IMF’s approach is understandable. As Jason Keene argued on this blog, the IMF at that early stage faced a trade-off between speed and transparency, and may have reasonably concluded that it would not be advisable to bargain over transparency measures if doing so would slow the deployment of much-needed funds. This conclusion, as a May 2020 IMF publication revealed, was influenced by the IMF’s experience with the 2014-2016 Ebola outbreak in West Africa: Many, including a prominent public health journal, blamed the IMF for the lethality of the Ebola epidemic, provoking a backlash against what was seen as unduly burdensome loans, a focus on austerity, and the underfunding of medical systems in vulnerable countries (see here, here, and here). Given this background, it’s understandable that the IMF might, on balance, favor speed over transparency, providing loans for Covid-related public health and budgetary shortfalls without much conditionality.

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Macro-Criticality: The International Monetary Fund’s Black Box

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Back in 2018, the International Monetary Fund (IMF) promised to tackle corruption within its member states when that corruption is “macro-critical”—that is, when corruption “affects, or has the potential to affect, domestic or external [macroeconomic] stability.” The IMF’s declaration that corruption is, or at least can be, “macro-critical” was an important development, one that anticorruption professionals applauded as a “major step forward.” For those less familiar with the IMF, though, the significance of the “macro-criticality” finding may not be immediately obvious. To understand this particular piece of IMF jargon, and why it’s so important for when and how the IMF engages in anticorruption work, it’s necessary to understand a bit more about how the IMF operates.

First and foremost, the IMF is a “monetary agency, not a development agency.” In contrast to a development agency like the World Bank, the IMF does not finance specific projects, nor is its mandate to promote economic development and poverty reduction as a general matter. Rather, the IMF helps protect global macroeconomic stability by lending funds to governments in dire straits. Furthermore, the IMF often requires, as a condition for receiving these emergency loans, that the recipient governments adopt institutional or policy reforms—a controversial practice known as “conditionality.” The IMF has also sometimes forgiven loans for particularly debt-burdened countries. And in recent years, the IMF has expanded its capacity development apparatus by providing advice to countries on a wide range of issues related to a country’s macroeconomic management, including central banking, monetary and exchange rate policy, tax policy and administration, and official statistics. All these services function to protect the international monetary system from potential risks, which is the IMF’s primary task.

But although the IMF’s mission is, at least in principle, narrowly focused on macroeconomic stability, the IMF has consistently faced the question of how to distinguish economic policy (which the IMF may influence) from social or political matters that are outside the IMF’s mandate (see, e.g., here, here, and here). Recognizing that there can be a porous boundary between economic and political matters, the IMF developed the concept of “macro-criticality.” So long as an issue—even a political or social issue—affects, or has the potential to affect, the macro-economy in a significant way, the IMF may treat the topic as it would any other issue traditionally recognized to be the IMF’s bread and butter.

And that’s why it was so important that the IMF has declared that corruption is a “macro-critical” issue. Once the IMF considers corruption in a given country to be macro-critical, the IMF may place anticorruption conditions on IMF loans to that country. The macro-criticality finding also validates data collection and capacity building measures related to corruption and anticorruption—measures that would otherwise seem to fall outside the IMF’s jurisdiction.

Nevertheless, confusion persists about when the IMF will consider corruption to be a “macro-critical” issue, and what exactly the IMF promised to do in its 2018 statement. One reason it’s hard to understand what the IMF actually committed to is because there are many ways for an issue to affect domestic or external macroeconomic stability. Perhaps most importantly, it’s important to distinguish a finding that an issue, such as corruption, is globally macro-critical—in the sense that there is robust evidence that this issue can have significant effects on macro-economic stability—from a finding that this issue is macro-critical in a particular country. Even a globally macro-critical issue may not by macro-critical in a specific country, either because the country in question already has adequate safeguards in place to address the issue, or because the macroeconomic risks associated with this particular issue are minimal in comparison to other country-specific threats.

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Financial Asset Recovery Conditions: The IMF’s New Anticorruption Playbook

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Since the Euromaidan revolution in 2014, the IMF has provided substantial macroeconomic stabilization assistance to Ukraine, but has conditioned disbursements on, among other things, significant anticorruption reforms—an approach that has been hotly debated, including on GAB (see here, here, here, and here). The most recent financial assistance agreement also targets corruption, but in a more indirect fashion. Last December, the IMF and Ukraine provisionally agreed to a $5 billion financial assistance program. It soon became clear, though, that the launch of the new program hinged on the Ukrainian parliament successfully passing legislation on land and banking reform. Ukraine complied, and the new agreement is likely to be signed in the coming weeks.

The banking bill, which provides a more general bank resolution framework, is clearly designed to address outstanding issues for the country’s largest commercial bank, PrivatBank, which was nationalized in December 2016. The PrivatBank case is particularly complicated due to the historically close relationship between President Volodymyr Zelensky and the bank’s former owner, the oligarch Igor Kolomoisky. (Prior to winning Ukraine’s presidential election in April 2018, Zelensky—a former TV comedian—had no political experience, and his only political connection appeared to be his friendship with Kolomoisky, who owned the television network that broadcast the TV program that catapulted Zelensky’s political career.) Many commentators speculated that the IMF had been delaying a bailout for Ukraine due to concerns that Zelensky’s administration would not aggressively pursue efforts to recoup money stolen from PrivatBank. By successfully leveraging and re-purposing past conditionalities, the IMF has driven a wedge between the Zelensky and Kolomoisky, forcing the new President to abandon his toxic personal relationship with this oligarch in order to unlock international financial assistance. While Ukraine is an interesting case study in its own right, the IMF should make more frequent use of financial asset recovery conditions in other countries. Not only can such conditions support a country’s fiscal sustainability framework, but they may be especially helpful if and when well-intentioned political leaders struggle to break ties with corrupt allies. Continue reading →

Should International Organizations Like the IMF Require More Anticorruption Conditions on Their Pandemic Emergency Funding?

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In response to the unprecedented COVID-19 pandemic, governments across the world are taking emergency measures to secure and distribute necessary medical equipment to hospitals, front-line medical workers, and at-risk groups. Moreover, to respond to the dangerous economic crisis that has resulted from stay-at-home orders and other essential public health measures, national governments have rapidly adopted new fiscal programs and other measures that have pushed trillions of dollars out the door. Multilateral institutions like the International Monetary Fund (IMF) have also stepped in to assist countries that have seen their foreign exchange inflows drying up due to a variety of factors associated with the pandemic (including lower international oil prices, lack of tourism receipts, and declining remittance flows). These countries urgently need for foreign exchange to purchase critical medical supplies and equipment from abroad. The IMF has existing facilities for providing emergency funding to address balance of payments shortfalls in times of emergency (the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI)), and has  already begun providing funding under these programs, with more funds likely on the way. In contrast to other IMF programs, there are relatively few conditions that recipients need to satisfy up front in order to have access to RCF/RFI financing.

The global anticorruption community has been understandably worried about the risks that emergency response funds could be misappropriated or mismanaged, which would impede the collective public health efforts. (See, for example, the pieces collected here and here). For example, Transparency International has pushed for open data publishing on public procurement, and Sarah Steingrüber, the Global Health Lead for CurbingCorruption, recently made the case on GAB for the establishment of oversight task forces and for directing some donor funds to enhancing anticorruption safeguards (i.e. public financial management improvements and CSO funding). With respect to the IMF in particular, a group of 99 civil society organizations (CSOs) sent an open letter to the IMF, pushing back against what they characterized as the Fund’s “retroactive approach” to anticorruption efforts, and instead called for loan conditions that would require recipient governments to (1) receive all IMF funds in a single Treasury account, (2) hire independent auditors within six months of disbursement, (3) publish a procurement plan with names and beneficial ownership information, and (4) repeal or amend laws that prevent groups from safely monitoring government spending.

While nobody seriously questions the importance of reducing corruption and other forms of “leakage” of funds spent to fight the coronavirus and its associated economic dislocation, much of the emerging commentary from the anticorruption community seems to lack a sufficient appreciation of, and engagement with, the trade-offs between controlling leakage and ensuring a sufficiently rapid response. The CSOs’ open letter to the IMF is an illustrative example of the apparent neglect of these trade-offs. Continue reading →

Ukraine’s Bold Experiment: The Role of Foreign Experts in Selecting Judges for the New Anticorruption Court

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The fight against corruption has been a central focus for Ukraine since the 2014 Maidan Revolution. In the immediate aftermath of Maidan, the country created four new institutions, the National Anti-Corruption Bureau of Ukraine (NABU) (an investigative body), the Special Anti-Corruption Prosecutor’s Office (SAPO) (with prosecutorial powers), the National Agency for Prevention of Corruption (NAPC) (responsible for administering the e-asset declaration system), and the Asset Recovery and Management Agency (ARMA) (tasked with recovering stolen assets). Yet the problem of impunity for grand corruption has persisted, and many believe that the weak link in the chain has been the Ukrainian judiciary. In addition to familiar problems of delay and inefficiency, Ukrainian judges are widely viewed as susceptible to political influence, and even corrupt themselves. To address this problem, in 2018—thanks to the combined lobbying efforts of Ukraine’s vibrant civil society and pressure from international donors, primarily the International Monetary Fund (IMF)—Ukraine enacted a new law creating a specialized anticorruption court known as the High Anti-Corruption Court (HACC), which began operations this past September.

The most innovative and controversial feature of this new court is the inclusion of foreign experts in the judicial selection process. While many countries have created specialized anticorruption courts, and many of these have special judicial selection systems that differ from the procedures for appointing ordinary judges, the participation of foreign experts in the HACC judicial selection process was unprecedented. Yet both domestic civil society groups and outside actors like the IMF and the Venice Commission (the Council of Europe’s advisory body for legal and constitutional matters) came to see foreign participation in the selection of HACC judges as crucial, particularly in light of the controversial selection process for judges to Ukraine’s Supreme Court in 2017. In the selection to the Supreme Court, multiple candidates were approved by Ukraine’s High Council of Justice (HCJ) despite the fact that those candidates were found to be ethically tainted by the Public Integrity Council (PIC), a civil society watchdog that assists the High Qualification Commission of Judges (HQCJ) in assessing the integrity of judicial candidates. Thus, when lobbying for the HACC, civil society and some members of parliament demanded that the law guarantee the presence of foreign experts with the power to veto judicial candidates, in order to ensure that no judges were appointed to the HACC if there was reasonable doubt about their integrity.

As a short-term stopgap, the involvement of foreign experts in the HACC judge selection is promising and may even serve as a useful model for other institutional reforms within Ukraine, and for other countries. But reliance on foreign experts to address concerns about selecting judges (or other officials) of sufficient integrity is probably not a long-term solution. Continue reading →

Will an IMF Loan End Equatorial Guinea’s Grand Corruption? Part II

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Part I of this post reported that last December the International Monetary Fund approved a $282 million loan to Equatorial Guinea to pull the economy out of recession and restore growth. Equatorial Guinea’s government is by any measure one of the world’s most corrupt, and the Fund determined that if it did not reduce corruption, the loan would have little or no impact. It therefore made addressing corruption a condition for extending the loan. IMF conditionality could be a potent weapon in the struggle to contain corruption. If Equatorial Guinea is held to the anticorruption condition, other governments will be on notice that to qualify for an IMF bailout, they too must combat corruption.

The loan requires Equatorial Guinea not only to enact new anticorruption legislation but to enforce it as well.  The loan will be disbursed in tranches over three years; the Fund can suspend or terminate it at any time if the government fails to comply with the anticorruption conditions.  Assessing whether a law has been passed is straightforward. Deciding whether it is being enforced is not.  It requires considerable judgement, and thus the IMF will have significant discretion to determine whether Equatorial Guinea is complying with the loan conditions.

Vigorous enforcement of the IMF-mandated anticorruption legislation could put many senior government officials in prison, and they will thus do everything possible to blunt enforcement. The Fund must insist the government make steady, measurable progress on enforcement, and if it does not, suspend loan disbursements until it does. Continued disbursements in the face of perfunctory enforcement would defeat anticorruption conditionality, neutralizing a powerful new weapon in the corruption fight.

The measures the anticorruption community can take to help prevent this outcome are detailed below. Continue reading →

Will an IMF Loan End Equatorial Guinea’s Grand Corruption? Part I

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Long scorned as a nearly perfect kleptocracy where corruption is unparalleled in its brazenness, Equatorial Guinea announced last November it would end the rampant corruption that has earned it such contempt, issuing a policy note saying it is “firmly committed” to measures to “enhance governance and transparency, [and] reduce corruption.” The note issued not from a newly-installed, reformist government but from the same one that has bled the country dry for three decades. The commitment to honest government is the price the International Monetary Fund is demanding in return for a loan to pull the economy out of a deep, prolonged recession largely caused by the ruling elite’s wholesale looting of the nation’s patrimony.

The Equatorial Guinea loan is not the first time the IMF has conditioned a bailout on anticorruption reforms. In 2015, in return for a four-year $17.5 billion loan, Ukraine was required to overhaul the institutions that investigate, prosecute, and adjudicate corruption cases, prohibit government employees from receiving large gifts, and compel senior officials to disclose their assets. The European Union, other international organizations and governments, and Ukrainian civil society all helped formulate these conditions, and all pressed the government to comply with them. Thanks to this concerted pressure, it is; and while Ukraine today is hardly corruption free, it is making steady progress in bringing corruption to heel.

Equatorial Guinea’s promises to the IMF appear in a policy paper titled “Good Governance and Anticorruption Action Plan” (Spanish version; English version). It there pledges not only to enact a slew of new anticorruption laws but to enforce them as well. But unlike Ukraine, Equatorial Guinea has no powerful neighbors demanding it comply with these promises, no strong, independent civil society organizations lobbying for them, and no vibrant, free press following its progress in realizing them.  Like most corrupt countries, it is run by a thuggish, repressive regime that locks up its opponents, or worse, and cares nothing for its standing in the international community or its citizen’s well-being.  The chances the government will honor the IMF loan covenants are thus much lower than they were in Ukraine. Close observers of the country expect the government will enact measures that look good on paper but are never enforced.  And then claim it has done what it promised. Continue reading →

Must the IMF Quantify Grand Corruption? A Friendly-But-Skeptical Reply to Global Financial Integrity

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The World Bank and IMF held their annual meetings last week, and it appears from the agenda that considerable attention was devoted to corruption—an encouraging sign that these organizations continue to treat this problem as both serious and relevant to their work. But does addressing the corruption problem effectively require that these organizations make more of an effort to quantify the problem? In a provocative post last week on Global Financial Integrity’s blog, Tom Cardamone (GFI’s President) and Maureen Heydt (GFI’s Communications Coordinator) argue that the answer is yes. In particular, they argue that the IMF should “undertake two analyses”: First the IMF “should conduct an annual assessment of grand corruption in all countries and publish the dollar value of that analysis.” Second, the IMF “should conduct an opportunity cost analysis of [] stolen assets”—calculating, for example, how many hospital beds or vaccines the stolen money could have purchased, or how many school teachers could have been hired.

This second analysis is more straightforward, and dependent on the first—once we know the dollar value of stolen assets (or grand corruption more generally), it’s not too hard to do some simple division to show how that money might otherwise have been spent. So it seems to me that the real question is whether it indeed makes sense for the IMF to produce an annual estimate, for each country, of the total amount stolen or otherwise lost to grand corruption.

I’m skeptical, despite my general enthusiasm for evidence-based policymaking/advocacy generally, and for the need for more and better quantitative data on corruption. The reasons for my skepticism are as follows: Continue reading →

Lessons from Moldova’s “Theft of the Century”

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One year ago today, on April 20th, 2017, a Moldovan businessman named Veaceslav Platon was sentenced to 18 years in prison. His crime? Helping to steal a billion dollars. Between 2012 and 2014, businessmen and politicians siphoned off money from Moldova’s three largest banks in a crime now known as the “Theft of the Century.” While corruption is endemic in many parts of Eastern Europe, the theft in Moldova was spectacular in its size and in the severity of its consequences.

This theft was an economic, social, and political catastrophe for Moldova. The amount of money that disappeared was similar to the amount implicated in the 1MDB scandal in Malaysia–but Malaysia’s GPD is 2.3 times the size of Moldova’s. The Moldovan government’s secret bailout of the banks cost $870 million, one-eighth of Moldova’s GDP. As a result of the theft, three of Moldova’s main banks went bankrupt and were liquidated; more banks are still under the supervision of the National Bank of Moldova, and there is persistent instability in the financial sector. And then there’s the human cost. For example, the misuse of money in the State Health Insurance Company’s accounts led to a medicine shortage in 2014-2015. During street demonstrations that ensued after the theft became public, two dozen people were injured. The political fallout from the theft has also been substantial: Confidence in the government was shattered, as every government branch and every major political party seemed implicated. Furthermore, because the party seen as most heavily involved in the theft was a pro-EU party, Moldovan support for joining the EU plummeted. Pro-Russian sympathizers capitalized on the public reaction, and the pro-Kremlin Igor Dodon was elected president in 2016. Dodon has talked about joining the Russia-controlled Eurasian Economic Union, halted participation in NATO exercises, and opposes the opening of a NATO office in Chisinau, Moldova’s capitol.

The investigation into the theft has dragged. More than 40 people have been implicated, and more prosecutions are supposedly in the pipeline, but only a few people have been convicted so far. With Moldova’s 2018 elections looming, now is a good time to look back at the fallout and lessons from the Theft of the Century.

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