Studies in the Theory and Practice of IMF Conditionality and Devaluation in Developing Countries

The International Monetary Fund imposes conditions on the use of its credit facilities. The IMF conditions are economic policies which the borrowing country must undertake to qualify for the use of its resources. The Fund claims that such policies would restore internal and external equilibrium and promote economic development. An alternative view suggests that the IMF conditions would create a "liberalized" foreign exchange and trade system which is wholly dependent on the continuous flow of foreign aid. To achieve its claimed objectives, the IMF imposes devaluation supported by anti-inflationary policies and liberalization of trade. In correcting payment deficits the IMF devaluation model attaches great importance to the mechanisms of relative prices, income distribution, and real money balances. The corrective mechanism of devaluation, in the context of the IMF devaluation model, will be impaired if infla­tion accelerates in the devaluing countries. Serious doubt is cast on the appropriateness of the IMF diagnosis of Balance of Payments disequilibria and the effectiveness of its policy prescriptions. The IMF diagnosis does not attempt to distinguish the underlying causes of payments deficit from their effects, and its policy prescriptions are not suitable for developing economies. Owing to its adverse effect on the terms of trade, and the low price and income elasticities of demand for imports, devaluation would not be successful in improving the balance of payments. Recently the IMF has adopted what is called a supply-side approach to exchange rate determination. The coefficient of competitiveness is measured as the ratio of foreign exchange earnings per unit of domestic resource used in the export sector. Export supply is regarded as "unprofitable" if the coefficient of competitiveness is lower than the prevailing exchange rate. Devaluation is justified to make activities profitable in this sense. Owing to the inflationary repercussions of devaluation, and the low export supply elasticity» serious doubt is cast on the relevance of the supply side approach in developing countries.