IMF macro-economic policy
The IMF’s main goal is to ensure that countries maintain ‘macro-economic stability and soundness’. The IMF believes that low inflation (under 10 per cent and often under 5 per cent); low government deficit (2-3 per cent); prioritisation of debt repayments over other public expenditure; increasing privatisation and rapid trade liberalisation are the key to macro-economic stability. It sees a direct link between inflation and public sector pay. It worries that increasing expenditure on the public wage bill will lead to more people having more money to spend, and therefore to inflation. And as low inflation is central to the IMF’s beliefs it is not surprising that wage bill caps frequently appear in its loan agreements. The impact of this policy can be seen clearly in the example from Kenya.
Many economists challenge the IMF’s macro-economic framework, specifically its belief in low single digit inflation and low deficit spending. While there is broad agreement that high inflation can be dangerous, and that it should remain below 20 per cent, there is less conclusive evidence about the ‘grey area’ of inflation – between 5-20 per cent.
Many leading economists believe that moderate inflation rates, under 20 per cent, can enable national growth and do not destabilise countries or hurt long- term economic growth rates. Further, the quick reduction of inflation (and deficit spending) rates can do real harm, through limiting public spending and investment in the social sector. If a country is committed to progress towards the MDGs there is a strong case for the IMF to allow greater flexibility in inflation and deficit targets – at least for a few years.