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A CA CRITICALRITICAL A ANALYSISNALYSIS OFOF IMF’ IMF’SS

ROLEROLE ASAS AA L LENDERENDER OFOF L LASTAST R RESORTESORT

Submitted By:

Saurabh Malik (0954187)

Mohit Chatpalliwar (0952588)

Rushank Karnik (0950427)

Chintan Shah (0934708)

University Of East London

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I NDEX No. Subject Page No.

Introduction 3

Study: 1

ARGENTINA Crisis

Overview of some studies on ARGENTINA

5

6

Study: 2

ZIMBABWE Crisis

Overview of Zimbabwe & IMF

Synopsis of Zimbabwe’s Economic Crisis

9

10

11

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Study: 3

BRAZIL Crisis

Contamination of Finance

Studies on Brazil’s Economic Crisis

IMF involvement

Significance of IMF

14

15

17

19

Conclusion 20

References 22

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R ole of IMF as an International Lender of Last Resort

Introduction

The International Lender of Last Resort concept originates from the principle of

central banking which was directed by Walter Bagehot almost a century ago. This principle

states that in a financial crisis, the central bank should perform its duty “to lend freely,

quickly, usually at penalty rates, and usually against good collateral” (Little and Olive). This

implies that in a financial crisis situation, there exists a situation of the multiple equilibriums

and it can be controlled by providing temporarily liquidity to those firms which are illiquid

but solvent. This could help avoiding the real economic harm. In case of International

lending the LLR concept requires the judgement that the same principle apply to sovereign

financial crisis which is largely devoid of tangible collateral. Such a difference in domestic

and international lending highlights the importance of having the right judgement that the

concerned sovereign is willing and able to secure the resources in sufficient time that makes

sure it is solvent based on complete faith and credit. One of the basic assumptions of the

lender of last resort, whether domestic or international, is that after the crisis is over, the

reflow of private lending will appear and the central bank or IMF will be repaid rapidly. In

this research paper our study will analyse the origin of crisis in three major countries namely

Argentina, Zimbabwe and Brazil. We will further analyse the role of IMF in the sustaining

the economy melt down.

The major function of the IMF during 1946 to 1973 can be explained to control the

fixed International exchange rate that was agreed at Breton Woods. The value of dollar was

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pegged with gold at $35 per ounce and exchange rates of the member countries’ was fixed

at different rates to dollar. The IMF helped the member countries to conquer the balance of

payment crisis with short duration loans by observing the exchange rate and

macroeconomic policies of these nations. This assisted the member countries to bring back

the currencies to their agreed value. However, when the Breton woods system finally

collapsed in 1973, many economists expected the collapse of IMF towards its lending

operations. Conversely, between 1970 and 1975 the amount of IMF providing was almost

twice in amounts. Again between 1975 and 1982, the lending rose by 58% in amounts.

However, IMF involvement in sustaining a country’s adverse balance of payments

crisis has been associated with conditionality. Conditionality is the commitments which the

country’s government make on cost-effective and economic policies while borrowing from

IMF and that IMF justifies as a guarantee and monitoring tool that its financial assistance is

carrying out efficiently in sorting out the borrower’s financial problems, such that the nation

will be capable to repay quickly.

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Study-1:

A rgentina Crisis

Argentina used to be IMF’s model country because IMF was providing its assistance

to Argentina since 1991, when the “Convertibility Plan” set the Argentina Peso at same level

of currency with U.S. dollar. The convertibility regime was successful solution to stabilize the

hyperinflation that existed in the beginning of 1990s. As a result the inflation rate which was

27 percent in 1991 reduced to single figure in 1993. The expansion rate was high until the

beginning of 1998. However, a series of external shocks started hitting Argentine economy

and resulted a sharp decline in the mid of 1998. Eventually, In 2001-2002, Argentina faced

the worst economic crisis in its history when the Government discarded the fixed exchange

rate system, declared a partial freeze on the deposits and non payment of government debt

which eventually led to decrease in production by 20 percent over 3 years, high level of

inflation, rise in unemployment and a collapse of banking system. Moreover there were

some budget limitations which damaged the government’s capability to maintain domestic

infrastructure like health, education and safety. These incidents raised the questions on the

country’s relationship with IMF because the economic policies of Argentina were under the

close scrutiny of IMF.

There were four major IMF agreements with Argentina; out of that two were

approved under Extended Fund Facility (EFF) during 1992 to 1998. The remaining 2 financial

assistance were under Stand-By Arrangements (SBA) which was accepted during 1996 to

2000. In 1998 EFF was taken as preventive as there was no intention of the country to use

the resources available in this arrangement. The SBA of the year 2000 provided full

assistance of resources to Argentina under the Supplemental Reserve Facility (SRF). By

September 2001, Argentine’s total commitment to IMF was raised to $22 billion.

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The below diagram represent the financial transaction between Argentine and IMF between

the years 1991 to 2002.

An overview of some studies on Argentina Crisis

Literature on different factors related to the Argentina’s crisis has flourished over the

past few years with the different opinions based on the root cause of crisis. We will analyse

some of the important literature reviews:-

Mussa (2002) argues that the root cause of crisis was insufficient fiscal tightening

during 1998 when there was a boom in the economy which showed a growth rate of 7% per

annum. His discussion was based on the fact that the growth of output was overestimated

in Argentina during the 1990s. The IMF itself made a wrong assessment of Argentina

economy by estimating its growth rate over and above the actual growth. IMF also did not

consider its vulnerabilities properly. This led to the IMF supported programmes highly

unmotivated and more prone to slippages particularly during 1998’s boom periods. The IMF

being a Lender of Last Resort carried on its financial assistance based on the inadequate

policies, even after issuing warnings to the Argentine’s government authorities on the

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country’s growing vulnerabilities and stressing them to adopt structural reforms and fiscal

adjustments during early 1998. But at the end skills to bring necessary financial regulation

and economic structural reforms was lacking. Thus it has been noticed that IMF was not

able to deliver required fiscal policy and structural changes.

Joseph Stieglitz (2002) wrote an article soon after IMF pending its support to

Argentine during Dec. 2001, where he disputed that the IMF prepared a “fatal mistake” by

supporting Argentine government to follow fiscal seriousness in the hope that it will re-

establish the confidence. He further argued that IMF programme did not execute its

promised and self-confidence is never restored as economy went into deeper recession and

the double digit unemployment. However Stiglitz also looked the mistakes by Argentine

authorities as they adopted dollar pegged peso exchange rate which was a failure in itself

due to the external shocks that were caused by the international volatility market. He

criticized IMF’s support to this and rather states that IMF should have encouraged Argentine

to move to an additional flexibility in exchange rate system that would be additional

reflective to its operating patterns.

Hausman and Velasco (2002) emphasizes that the crisis originated from the severe

downfall of 1998. During that period, expected future growth of exports reduced

significantly, resulted in greater risk premium and smaller inflow of capital. This resulted in

lesser domestic investment, which further reduced output. Due to this reason there was a

reduction in the creditworthiness and the borrowing capacity of the country. In 1998, after

the crisis of Asia, Russia and Brazil, Argentina felt the effects of uncertainty of investor which

led to the increase in interest rates. Argentina’s economy got affected when the Brazilian

Real was deposited and Argentines domestic products could not compete with the Brazilians

cheaper export. IMF’s responsibility was to help Argentina during this crisis by -making its

convertibility system discarded and deflates the bubble economy which emerged in 1990’s.

However IMF lent Argentina billions of more to up hold its economy for little longer time.

Feldstein (2002) explains the Argentina crisis by placing much focus on the exchange

rate regime. He argues that the fixed exchange rate system creates a hurdle in achieving

competition by the long-established devaluation of currency (comparison with various

countries including UK, Brazil & Korea). Besides struggle of trade unions against lesser wages

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prohibited the reduction in cost of production which can established the devaluation in real

terms without making any exchange rate variations. IMF should have played an important

role of LLR in encouraging the authorities by giving them exit options through their policy

advice and financial support much earlier in 1990’s before Argentine came under pressure.

However, since the exit costs were presumed to be too high, the authorities were plunged

to a system which collapsed the overall economy in 2001.

Roubini (2001) and De la Torre et al. (2002), with the similar views, have argued that

convertibility does not inoculate a country from the balance-sheet effects of a real exchange

rate adjustment; it only creates the adjustment through deflation and unemployment which

erodes the repayment capacity of debtors whose major earnings come from the non-

tradable sector. They argue that the dollar fix the country less able to export and develop.

Lesser export earnings reduced Argentine’s ability to pay back debt and narrow amount of

foreign loan. The limited outside income resulted in drop of investment and production

which in turn reduced order for home manufacture.

Calvo (2002), however, emphasizes the sudden stop of capital flows in Argentina

and compare it with other Latin American countries that were also subject to sudden stop of

capital after Russian crisis of 1998. In Argentina the loans from commercial banks are largely

dollarized but the income of bank debtors largely comes from non-tradable sector. So this

difference leads to high increase in real exchange rate and thus financial downturn.

Argentina’s economy was suffering from high public debt dollarization, high swings in real

exchange rate and contingent liabilities. However in other Latin American (e.g. Brazil)

countries this sudden stop was compensated by high FDI. These vulnerabilities were not

served by IMF due to its unrealistic policy implications.

Argentine study, thus, proves that the IMF’s assistance as a Lender of Last Resort

helped the country initially but its conditionality were not able to recover the country from

external shocks. IMF should have given the options to the authorities to come out of the

convertibility regime in early 1990’s itself. However, I also consider that fact that the

interaction between the currency board and fiscal policy played a crucial role in moving the

country towards crisis.

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Study-2:

Z imbabwe Economic Meltdown

Zimbabwe tied up with the IMF on September 29, 1980 and its quota is SDR 261.3

million (about US$385 million). Zimbabwe presently is at the peak of its inflation (an annual

rate of 1,730 percent in February, 2007), highest in the world. These high rates of inflation

have added to the retrenchment of Zimbabwe’s economy, which has regressed by about 30

percent since 1999. Zimbabwe’s melting economy received leverage when the IMF

sanctioned a $510m (£311m) loan. This move however created a rift between the allies in

Zimbabwe’s unity government and it was feared that the money would be shored up by the

political sharks in President Robert Mugabe's regime. The governor of the reserve bank of

Zimbabwe, Gideon Gono confirmed that a payment of $400m was made to Zimbabwe as it

was a country hit by global recession and $110m would follow to further aid the country’s

deteriorating economy. Zimbabwe outlined its plans stating that it would use the money

from IMF to reload on its depleting foreign currency reserves. IMF released the funds on

precondition that would not be sidetracked to other enterprises. Political experts saw the

move by Zimbabwe's unity government as a symbol of it being welcomed back into the

international circuits. IMF closed down its program in Zimbabwe ten years ago in 1992 and

formally withdrew in 2002, adopting a "declaration of noncooperation" with the Unity

government.

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Graph depicting Zimbabwe’s inflation from 1998-2008

Overview of Zimbabwe and IMF association:

The Zimbabwean government was in a state of continuous overdue arrears to both

The General Resources account of IMF and Poverty Reduction and Growth Facility

amounting to SDR 89 million (about US$133 million) since February 2001. It was the singular

case of prolonged arrears to the Poverty Reduction and Growth Facility-Exogenous Shock

Facility (PRGF-ESF) Trust. Due to this in 2001 IMF took corrective measures and suspended

technical aid and removed it from the list of PRGF-ESF-eligible countries. In 2003,

Zimbabwe’s voting rights were suspended. Zimbabwe completely settled its arrears to GRA

which resulted in ending of the withdrawal procedures against Zimbabwe.

The association between IMF and Zimbabwe for technical assistance was reinstated by the

Executive Board of the IMF in May 2009. It lifted the deferment of funds and technical aid to

the targeted areas. Thus currently the liaison with IMF is for technical support in the spheres

of (i) lender-of-last-resort operations and banking supervision (ii) central banking

governance and accounting (iii) tax policy and administration; and (iv) payments systems.

This decision was taken by the IMF after appraisal of a considerable enhancement in

Zimbabwe’s agreement to collaborate and improve on economic policies and also its

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conformity to address the overdue arrears problems. IMF summarized that aid would be

provided by the IMF’s core areas of expertise to implement the government’s

macroeconomic stabilization plan. On February 19, 2010, on the request of Zimbabwe’s

Finance Minister Tendai Biti IMF restored Zimbabwe’s voting rights and its entitlement to

use funds from the IMF’s General Resources Account (GRA).

Synopsis of studies on Zimbabwe’s Economic Crisis:

Several key authors have a varied view point on the Economic crisis and IMF’s aid to

Zimbabwe. Some of them have been outlined below:

Thomas J. Hornes (2009) highlights in his article that IMF, as a Lender of the Last

resort was utilised by its prime and powerful shareholders, to punish Zimbabwe for its

national policies. He states that IMF instead of warranting economic stability of the world

was complicit in destabilisation of the Zimbabwean economy. He places focus on the unfair

treatment given to Zimbabwe when the government defaulted on its debt payment to IMF

in 2001. The IMF disagreed to reorganise this debt and also refused to provide Zimbabwe

with substitute lines of funds or any other support to help the economy to stabilise. Instead

of technical support at time of crisis, the IMF activated expulsion protocols against

Zimbabwe further destabilising the economy. He traces the desperation of the government

to print Zimbabwe dollars to repay its IMF debts.

Tawanda Hondora (2009) criticizes IMF’s insistence on Zimbabwe for clearing the

arrears of over US$175 or the penalty of facing expulsion from the organization. She

highlights the plight of the government and its desperation, as it paid back £150 million of

its debt to prevent expulsion. Zimbabwe can not afford the clearance of debts at this stage

as it faces critical shortage in foreign currency reserves, has very high rates of

unemployment, crippling inflation ratios and faces scarcity in essential commodities and

fuel. Also, the UN reports suggest that Zimbabwe is ailing from famine. Thus she considers

the aid provided by IMF to be a farce and its pressure on Zimbabwe as a blow to the already

crumbling economy.

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Terence Kairiza in his publication ‘Unbundling Zimbabwe’s journey to hyperinflation

and official dollarization’ highlights the Zimbabwe’s financial and economic dislodgement

(illustrated by high rates of hyperinflation) which ended in the implementation of official

dollarization in 2008. These measures came along with the land reform programme which

demanded the snatching commercial farms from whites and its reallocation to the landless

black majority. Though he conforms that IMF loan in the nineties did provide an initial boost

to the failing economy and IMF’s agreement to resume cooperation in 2009 brought about a

substantial change in the world’s outlook towards Zimbabwe, he also highlights a letter that

was addressed by the Finance ministry to IMF requesting monetary aid of USD1.3 million

per month in1998 or 0.4 percent of GDP to finance the war. Also a supplementary USD3

million per month or at 0.6 percent of GDP (IMF, 1999) was requested for deployment of

additional troops. However, on the basis of a leaked memorandum form the Finance

ministry, Terence Kairiza hypothesizes the actual expenditure to have been at least ten

times the official figures. The criticizes the utilization of foreign exchange reserves to such

high magnitudes for purposes of war which ultimately led to the weakening of the

Zimbabwean currency which had further disastrous effects on price stability.

Antonia Juhasz (2004) highlights the devastating impacts of IMF’s loans to

Zimbabwe. She states that longer a nation succumbs to these funds, the more debt ridden it

becomes. The IMF Enhanced Structural Adjustment Facility (ESAF) loan that was provided to

Zimbabwe was severely flawed and according to IMF’s own reports almost 75% of the ESAF

programs have not succeeded. Under the flawed program Zimbabwe had to reduce

government spending, the manufacturing sector was hit hard and thousands of workers

were terminated from their services leading to higher unemployment rates. During the

supposed reform from 1991- 96 assisted by the IMF funds, the Zimbabwe’s manufacturing

services dropped by 9 percent and earnings fell by 26 percent. There was a high level of

public sector employment cut, and earnings fell by 40 percent. Price of food sky rocketed

increasing by 36 percent. The healthcare system crippled, tuberculosis, levels of HIV/AIDS

reached a peak, Infant Mortality Rate was on the rise and spending per person on health

care dropped. Thus Zimbabwe spiralled into a debt ridden nation, continuously losing

money and concurrently having to pay off its interest to IMF. She states that IMF instead of

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enriching the life of the population and helping in economic growth imposed harsh

conditions on Zimbabwe which adversely affected the society.

Barbara Slaughter (2002) states that the powerful Western stake holders of the IMF

under the facade of transparency and accountability intend to strengthen its colonial

control on Zimbabwe. She states that the Zanu-PF government in the beginning associated

with IMF demands and executed the IMF motivated structural adjustment program (1991-

95). This included tax cuts for the richer class and cut down on public spending. However

this led to a marked increase in poverty and caused dissent in public leading to protests and

strikes. When the Mugabe government felt threatened they began to object to IMF’s

requirements. When Zimbabwe was unable to meet its fiscal target, IMF withdrew its

support. The Mugabe government under acute economic and social crisis started seizing

farms owned by whites and resorted to violence. The Human Rights commission reports

that thousands of people were tortured and made homeless in this movement which lasted

2 years.

The Zimbabwe case study highlights the initial boost to the crippled economy that

the IMF loan provided especially in areas of tax policy administration, infrastructural

development and upheaval of the ailing healthcare framework. The IMF loan opened doors

for Zimbabwe into the western economic reserves. However the IMF loan to the

government has been plagued with reports of illegal hoarding by politicians and the funds

being sidetracked to warfare and ammunition development.

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Study-3:

B razil Crisis

Causes of the crisis: Real Plan, Crawling Peg and Inflation:

Brazil initiated a plan in 1994, named after its new currency the real, to stabilise its

economy after a few other plans to stabilise the price failed which also resulted in high

inflation.

The optimism was on rife although there were thought to be fundamental issues with the

Real Plan. The areas that the Brazil attempted to address are the following:

- Correction in large government deficits.

- Reduction in fund transfer by Central Government to State Governments and more

local governments.

- Increase income tax.

- Restraints on monetary policy.

As a final step, the Brazilian Government pegged the real to the dollar. The way

‘Pegging’ works is that the use of the central reserve of dollar to buy the Real and vice versa

as deemed necessary to control the exchange rate between dollar and the real. This means

that the government would free the supply of dollars should there be a less supply of dollars

that holders of real wanted to buy from a free market holder(s). This way Brazilian

Government was making the world known about its monetary policy.

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The pegging of dollar to its currency, Brazil should have had a parallel monetary

policy to that of the United States. A very real possibility is that, ultimately, there will be

intolerable stresses put on Brazil’s currency system if it wanted a more inflationary policy to

be run in comparison with United States. This also means that Brazilians would be able to

buy US products at a cheap rate whereas US will have to spend excessive amount to buy

Brazilian products. Within a short period of time, Brazilian government realised the very fact

that it will be impossible to match monetary policy of the US. This realisation came after

signs that American products were attracted to Brazilian people and there was very limited

interest shown in Brazilian products worldwide as it would be much costlier. This, in a way,

forced Brazil to adopt a crawling peg. This means that the exchange rate would be allowed

to slide down within limits. The whole world received a message that that Brazil is making

every effort to control the country’s inflation.

Contamination of FinanceFinancial contamination, in simple terms, means that the investors move their

money from one country in crisis to another country. Due to the overvaluation discussed

above, Brazil started to suffer from this. During crisis in Asia (1997) and Russia (1998),

investors reinvested their money from Asia, Russia and even Brazil in light of then recent

developments in the respective countries. If this transfer of investment was allowed to

occur, the government reserves of dollars would start to empty as the government would

have to supply the dollars to maintain the ‘pegged’ exchange rate. This forced Brazil to raise

their interest rates simply to entice investors to keep investing in the country. The surge in

the interest rate is shown in the Figure 1 below.

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Korean crisisRussian crisis

Brazilian Interest Rates

0

5

10

15

20

25

30

35

40

45

50

04/10/96 21/02/97 11/07/97 28/11/97 17/04/98 04/09/98 04/01/99

Per

cen

t

Brazilian Interest Rates

Figure 1 – Brazilian Interest Rates

However, it was felt that these large increases in Brazilian interest rates did not

assist Brazilian Government a great deal. As a result, Brazil had to release much of its foreign

currency reserve for the good of the real. It should be noted that the Brazil’s dollar reserves

which were $70bn in early 1998 dropped by almost half in less than 12 months. On a year to

year basis, Brazil’s primary deficit was not too large. However, a significant surge in interest

rates made the overall deficit much greater which reached to 8% of Brazil’s GDP. This

resulted in debt holders being highly reluctant to hold the debt of Brazil and a direct impact

on this was that the short term to total debt of Brazil increased significantly. Although the

President Cardoso announced a new budget plan to generate savings of $23bn, hopes

started to fade badly due to a deficit reduced bill being voted down by his own coalition.

Also, an effort to reform the pension system apparently failed. Meanwhile, in December

1998, the capital outflow rate reached as high as $350millions per day, causing further

problems.

The critical arguments and the respective contributors

Some well-known economists called for a devaluation of Brazil. When President

Fernando Henrique Cardoso announced a new budget plan to generate savings worth

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$23bn, some economists forecast that primary surpluses will be generated in the next year

if this budget and the plan succeeded.

Mary Smith, a financial advisor who represented the United States on the IMF’s

executive board during the Reagan Administration, believes the spending cuts in Brazil will

have short term and long term effects. It is likely that there will be a slowdown in Brazil’s

economic growth. As a matter of fact, it was noted that the unemployment went up from

6% in 1997 to 7.5% in 1998. This could worsen if public spending cuts are introduced

without much thoughts or logic behind them. Mary also said that the real is the Brazil’s

support. It is a way of avoiding market contamination that could spread to other countries.

Brazil is reported to be devaluing its currency at 7.5% per year rate, this together will

measures to bring the value of the Real into link with economic performance will provide a

further boost to the overall economic growth.

Steven Radelet of Harvard Institute of International Development (HIID) reckoned it

is typical IMF asking for spending cuts. These cuts were a centrepiece of IMF’s original

programmes in Asia which lead it into the recession. IMF did realise it as a mistake,

however, being honest here, spending cuts are, in some cases, necessary particularly when

the government is carrying large budget deficit over a few years period (e.g. Brazil). So, in

Brazil’s case, IMF would be correct to suggest strict cuts in public sector spending. Steven

carried on and suggested the Brazil should not have allowed an overvaluation of its currency

and if IMF supports it, it does not solve this issue. The Government should solve this issue by

itself by allowing the Real to depreciate modestly to an appropriate level and to guard it

against the possibility of an overshooting of the exchange rate by restructuring Brazil’s debt.

Steven added that it is likely that Brazilian government and the IMF’s basic approach would

be to protect the currency that is with a combination of very high interest rate and a high

amount of international loans. This approach is claimed to be not capable to solve the long-

term problem of currency being overvalued, and does not provide that resolving or assuring

stimulus for the exporters that they need to increase industry growth and avoid further

recessional effects.

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It is often argued that when IMF money goes into an economy, it appears to be

passed out to the wealthy who invests the same money into the source countries.

IMF Involvement

A delegation of Brazilian officials arrived in Washington D.C. on 17th October 1998 to

discuss Brazil’s financial situation based on then current policy assumption (including

monetary policy) with a wider community at the IMF-World Bank Annual Meeting. The

discussions were primarily aimed at preparing solid grounds for the potential support from

IMF for a multiyear financial programme to be announced by the Brazilian government that

support the countries. It is argued that the IMF expressed the support in principle and in

return the Fund asked for the Government of Brazil to propose, in detail, with a plan and

policies. On 13th November 1998, the managing director of IMF, Mr. Michel Camdessus

received a formal request from the President of Brazil. As expected, the President included

the proposed policies and objectives of the Brazilian Government for 1998 – 2001. The

Government of Brazil requested for the IMF for a support of $18million in the form of a

stand by for a period of 3 years. Also, extra support in monetary terms was requested. The

IMF indicated that it would, together with potential multilateral or bilateral, would provide

support totalling more than $41 billion between 1998 and 2001, of which $37bn will be

available if needed over the next 12 months. This sort of commitment from IMF was a result

of the Government of Brazil’s sound programme which strongly appears destined to greatly

brighten the economic prospects of the region as a whole.

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The Significance of IMF

The IMF is considered as a lender’s last resort for help of monetary terms. Some may

argue that IMF exacerbates economic problems by imposing tough conditions and therefore

does more harm than good (i.e. Asian Crisis of 1997). Also, it is a debatable issue whether

the IMF’s ‘one size fits all’ way of using economic policy (i.e. blanket policies) work with

each and every country. The true reality, for Brazil anyway, is that the IMF programme did

help it achieve economic stability. The Brazil has payments crisis, depreciating exchange

rate, and high inflation. The IMF help in monetary terms together with all the policy reform

that it imposed on Brazil have given the government of Brazil a chance to prosper once

again, and it is there for everyone to see what Brazil has achieved since the year 1998.

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Conclusion on IMF as a Lender of Last Resort.

We believe that Brazil economy has been recovered from the financial downturn;

IMF help to Brazil in monetary terms at time of crises has proved that IMF played an

important role in boosting the economy. As its being observed from last 1 year Brazil

economy, in terms of GDP, trade practices and currency value has got a substantial height.

The reason is that international organizations have entered in the Brazilian market; this will

gain more confidence and will generate revenue at great pace. As we have seen IMF help to

Brazil at the time of economic problem, Brazilian government appreciate IMF’s help as

strong bonding is developed between both, now the scenario is that Brazil economic boom

gave higher value to their currency, as current scenario is Brazil is helping IMF in terms of

providing funds so that IMF keep helping underdeveloped countries.

However, In case of Argentina, the government did not adopt the policies which

were synchronised with IMF’s conditionality. Of course, the key policy decision and lack of

supportive fiscal and structural polices raised the question on IMF’s role as a Lender of Last

Resort. The Argentina crisis reflects the limitations in IMF’s surveillance to identify the

vulnerabilities at the early stages of boom and in bringing about required changes when

these vulnerabilities become perceptible. The fund’s fiscal policy assessment was also

inadequate and did not consider risk to debt sustainability in case of slower growth rate.

The appreciation of Dollar (to which peso was pegged) and devaluation of Brazilian Real

weakened the country’s competitive position. It is true that IMF did support Argentina in its

crisis, but the action taken by fund to access the possible market failure was not prompt.

Such actions are also important to avoid contagion. Thus rather than depending on IMF’s

financial assistance, Argentina should design its domestic policies in such a manner which

involves the support of multilateral organisations. This could help the country in further

destruction of its productive capacity. A lesson from Argentina crisis is that the future

operation of Lender of Last Resort should also believe the government’s political ability to

implement its adjustments programme. As in case of Argentina where Populist Party’s

inability to implement such IMF programme led to a decline of overall economic system.

The crisis of Argentina suggests that IMF should evolve its role more actively as a LLR in

setting up the policies which could define a country’s repaying capacity. In nutshell, the LLR

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support of IMF should continue to be given to the countries subject to a better policy driven

political party which can implement IMF’s fiscal and monetary policy.

In case of Zimbabwe, the suspension of technical assistance in 2002 led to a setback

in the economic development policies and the pressure to pay back the mounting IMF

arrears caused further destabilization of the Zimbabwean currency. IMF as the lender of the

last resort should execute a wide framework of economic and structural restructuring.

Though these developments need not be primarily sponsored and controlled by the IMF,

the IMF along with the government needs to put into place a comprehensive action plan

which will ensure stability and boost economic and structural development.

Thus IMF as the lender of the last resort should ensure that it a key to the solution

and not the problem itself.

References:-

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Argentina

William R. Cline, September 2005, Centre for Global Development and Institute for International Economics “The Case for a Lender-of-Last-Resort Role for the IMF”.

Available at: http://www.iie.com/publications/papers/cline0905imf.pdf

Stanley Fischer, January 1999, “On the Need for an International Lender of Last Resort,” Journal of Economic Perspectives, 1999, pp. 85–104.

Available at: http://www.imf.org/external/np/speeches/1999/010399.HTM

Olivier Jeanne, September 2000, “The IMF: An International Lender of Last Resort?”Available at: http://www.imf.org/external/pubs/ft/irb/2000/eng/02/INDEX.HTM#sum1

Stiglitz, Joseph E., “Argentina’s Collapse Incited the Largest Default in History”, In: The Straits Times, January 10, 2002.

Available at: http://www.networkideas.org/featart/jan2002/fa10_Argentina_Collapse.htm

Hausmann, Ricardo, and Andrés Velasco, 2002, “The Argentine Collapse: Hard Money’s Soft Underbelly,” unpublished, Kennedy School of Government, Harvard University.

Available at: http://www.imf.org/external/np/ieo/2003/arg/index.htm

Feldstein, Martin, 2002, “Argentina’s Fall: Lessons from the Latest Financial Crisis,” Foreign Affairs, Vol. 81, Issue 2 (March/April)

Available at: http://www.nber.org/feldstein/argentina.pdf

The Crisis That Was Not Prevented: Argentina, the IMF, and Globalisation,FONDAD, January 2003, www.fondad.org

Roubini, Nouriel, and Brad Setser, 2004, Bailouts or Bailins?Responding to Financial Crises in Emerging Economies (Washington: Institute for International Economics)

De la Torre, A. E. Yeyati, and S. Schmukler, “Argentina’s financial crisis: floating money,sinking banking,” mimeo World Bank 2002.

Calvo, G. “Sudden stops, the real exchange rate and fiscal sustainability,” mimeoIADB 2002.

Timothy Geithner, Policy Development and Review Department, INTERNATIONAL MONETARY FUND, Lessons from the Crisis in Argentina, October 8 2003

B. Eichengreen, Toward a New International Financial Architecture, Institute for International Economics, Washington D.C., 1999.

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Conference on IMF Reform, Institute for International Economics, WashingtonDC, September 23, 2005.

Zimbabwe

Antonia Juhasz. (2004). The Tragic Tale of the IMF in Zimbabwe. Available at:

http://www.tyrannyofoil.org/article.php?id=125.

Bond, Patrick. (1998). Mugabe under siege: Behind the protests. SAR Journal, 13(2), pp. 1-

12.

Coorey, Sharmini., Clausen R. Jens R., Funke, Norbert., Muñoz, Sonia., & Ould-Abdallah,

Bakar,(2007). Lessons from High Inflation Episodes for Stabilizing the Economy in Zimbabwe.

IMF Working Paper, WP/07/99.

David Fish Eagle. Metro Zimbabwe. (2009). IMF Executive Board Approves Targeted

Technical Assistance to Zimbabwe. Available at:

http://www.zimbabwemetro.com/finance/imf-executive-board-approves-targeted-

technical-assistance-to-zimbabwe/

Fred Fuld. (2008). Zimbabwe Inflation, Available at: http://www.straightstocks.com/current-

market-news/zimbabwe-inflation-breaks-above-11200000/

Jordi Martorell. (2002). Review: Zimbabwe's Plunge - Exhausted Nationalism, Neoliberalism

and the Search for Social Justice. Available at: http://www.marxist.com/zimbabwe-plunge-

nationalism-neoliberalism.htm

Links International Journal of socialist renewal. (2008). ‘Lessons of Zimbabwe: An exchange

between Patrick Bond and Mahmood Mamdani’. Available at:

http://links.org.au/node/815/9693

Makoni, T. (2006). Aetiology of Zimbabwe Banking Crisis 2003-4.

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University of Zimbabwe News.

Available at: http://universityofzimbabwenews.blogspot.com/2006/08/aetiology-of-

zimbabwe-banking-crisis.html

Ndlela, B, Daniel. (2008). Developing a Transformation Agenda: Key Issues for Zimbabwe’sEconomic Reconstruction. Idasa, Cape Town.

Slaughter, Barbara. (2002). European Union takes united action against Zimbabwe. World Socialist Organization. Available from: http://www.wsws.org/articles/2002/feb2002/zimb-f27.shtml

Thomas J. Hornes. (2009). IMF contributes to Zimbabwe's hyperinflation. Available at: http://www.newzimbabwe.com/pages/opinion119.13850.html

Tawanda Hondora. (2009). Zimbabwe sanctions: are they political or economic? Available at: http://www.newzimbabwe.com/pages/sanctions36.13187.html

The Prudent Investor. (2005). IMF in Zimbabwe - Expect the Economy to Get Worse. Available at: http://prudentinvestor.blogspot.com/2005/06/imf-in-zimbabwe-expect-economy-to-get.html

The Guardian UK, Available at: http://www.guardian.co.uk/world/2008/apr/03/zimbabwe

Terrence Kairiza, National Graduate Institute for Policy Studies (GRIPS). (2009). Unbundling Zimbabwe’s journey to hyperinflation and official dollarization.Available: http://www3.grips.ac.jp/~pinc/data/09-12.pdf

Brazil:

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Gruben, William C. and Sherry Kiser (1999), "Why Brazil Devalued the Real," Federal Reserve Bank of Dallas Expand Your Insight, July 1, http://www.dallasfed.org/eyi/global/9907real.html

International Monetary Fund. April 1998. ‘Brazil: Recent Economic Developments’. Available at: http://www.imf.org/external/pubs/cat/longres.cfm?sk=2562.0

Morris Goldstein. February 2003. ‘Debt Sustainability, Brazil, and the IMF’. Number WP03- 1.

Joint Communique between Brazilian Authorities and the IMF. 20 October 1998. News Brief: 98/38. Available at http://www.imf.org/external/np/sec/nb/1998/nb9838.htm

IMF Approves Stand-by Credit for Brazil. Press Release: 98/59. 02 December 1998. Available at: http://www.imf.org/external/np/sec/pr/1998/pr9859.htm

Presidencia De Republica. Official Website. Available at: http://www.ipeadata.gov.br/ipeaweb.dll/ipeadata?45276328