Just over a year ago – June 2005 – Economic Justice News reported on the creation of a new IMF mechanism called the Policy Support Instrument (PSI). At that time, we were speculating on the reasons for its invention, and concluded that it was most likely a clever tool for maintaining IMF policy domination in countries that would be getting 100% of their IMF debts cancelled by the G8 debt deal then being concluded.

A year later it’s still not entirely clear what the ultimate use of the PSI will be. Only four countries, all of them African, have committed to entering into a PSI. While it has not been pushed as vigorously as we predicted with countries graduating from the debt deal, it does indeed appear to be a tool for keeping countries in “the game” when they might otherwise leave the IMF behind. In fact, it might well be taking its place as part of the repackaging of the IMF at a time when its mission is being widely questioned. It could help make the IMF look less demanding, even though the PSI in no way represents a retreat from the IMF’s customary inclination to dominate developing countries.

What is the PSI?

The IMF usually describes the PSI as being designed for countries that “have made significant progress toward economic stability; do not need or want financial support from the Fund; but would like to seek ongoing IMF advice, monitoring and endorsement of their economic policies.” It’s basically a standard IMF program without the loans, but with the standard “structural adjustment” provisions (privatization, liberalization, spending cuts, etc.), and the usual very low inflation targets. Instead of reviewing a country’s progress and indicating its conclusion by either releasing the next installment (“tranche”) of the loan or cutting it off, the IMF still does the review, but just publishes its findings.

Those findings are sufficient to serve the institution’s “signaling” function – its approval or rejection of a country’s economic program which other multilateral, bilateral, and private creditors look to as the main indicator of whether the country can be considered creditworthy. When the IMF cuts a country off, the other official agencies generally follow suit. It’s this “gatekeeper” function, rather than the IMF’s loans (which are rather small by comparison to those of the other agencies) that give it its greatest power.

The PSI does not represent so much a new way of working for the IMF – it already had “staff monitoring programs” which served mainly as “signaling” devices and did not involve loans – but a more explicit recognition of its role as a virtual credit rating agency for developing countries. Before the PSI, everyone talked about this function of the IMF’s, and most even acknowledged that it was the institution’s most important one. But it was not officially codified anywhere – it was an “unwritten agreement” with no genuine, official status. The PSI puts the IMF’s cards a little more clearly on the table.

The Danger of the PSI

The threat we saw in the PSI last year was that it would be a way of seducing, or pressuring, countries that could otherwise finally free themselves of the IMF’s domination – the countries receiving 100% multilateral debt cancellation under the new G8 deal – into continuing to adhere to the disastrous IMF policies that have exacerbated their poverty for the last 20 years or so.

We assumed that getting governments to make the break from the IMF would require serious political campaigning within the countries, and might not happen right away. The concern was to keep the threat of new entanglements with the IMF to a minimum – to avoid the situation where governments could claim to be distancing themselves from the IMF without actually freeing themselves from its rules.

Eighteen countries were initially designated to receive the 100% cancellation under the 2005 “G8 deal” – now dubbed by the institutions the “multilateral debt relief initiative” (MDRI). After strenuous efforts on the part of many actors within the international financial institutions (IFIs) to exclude or postpone up to one-third of the countries from the program – efforts that were countered by activist opposition – one country from among the 18, Mauritania, was excluded. The others saw their debts to the IMF cancelled on January 1, 2006, with the World Bank, and, where applicable, the African Development Bank, completing their cancellation on July 1. In mid-June, the IMF announced that it would cancel Mauritania’s debt as well. A few additional countries have either just seen their IMF debt cancelled, or will in the next month or two.

A country that enters into a PSI is by no means in a more onerous or dangerous position than one which accepts loans as part of a conventional IMF program. Indeed, if the choice was just between the two, the PSI would be preferable because it doesn’t lead to more debt accumulation, and thus presents less threat of ongoing IMF domination -- once the government is finally persuaded to stop signing agreements with the IMF, that is.

Overall, the danger of the PSI is (1) that it will deter countries from declaring their independence from the IMF, and (2) that acceptance of it will more firmly establish the IMF’s gatekeeper function, which is what makes the institution, so committed to its market fundamentalist agenda, so dangerous.

The First PSI: Nigeria

Despite the fact that the PSI was apparently developed in tandem with the MDRI, the first PSI country was Nigeria, which was not considered for the MDRI. Its PSI was announced in May 2005, and used explicitly in order to help Nigeria qualify for Paris Club debt rescheduling. The Paris Club is the association of big bilateral creditors (including the U.S. government) which negotiates collectively with indebted governments. It requires that a country have an in-force program with the IMF in order to qualify for any rescheduling. Nigeria did not, and political realities in the country militate against it ever borrowing from the IMF, so the PSI was settled on as a good compromise.

Potential Embarrassment for the PSI: Uganda

The next country to agree to a PSI fit the predicted pattern – Uganda. As one of the 18 countries on the MDRI list, and a long-time “poster-child” for the programs of the international financial institutions, Uganda was in some ways a logical choice to take out a PSI when its old IMF program expired in January.

But whether Uganda is indeed a “mature stabilizer” – IMF jargon for a country that has gone through its economic stabilization programs and maintained low inflation and budget deficits -- is an open question now. A year ago, the label would probably have been uncontroversial. Since then, however, President Yoweri Museveni has been engaged in a war of words with the international donor community. His blatant manipulation of the national legislature to change the constitution so that he could serve a third term as president – in elections he won in February – have changed his reputation from fearless reformer to corrupt autocrat (a shift that more clearly reflects the reality that has been clear for several years). The British government and other donors have cut off aid or are threatening to do so. In a country where over 40% of the national budget comes from external aid, this is a potentially serious situation.

As in the case of Robert Mugabe in Zimbabwe, Museveni’s recent defiance of donors’ attempts to infringe on Uganda’s sovereignty may sound good to those of us who oppose the IMF and World Bank on exactly those grounds, but its real meaning has more to do with domestic politics. Mugabe is clearly reaching for any populist slogans he can use, but Museveni has even less credibility on the subject, since in his 20 years in power he has never resisted IMF/World Bank policies; indeed he has slavishly sought them out.

Uganda is, meanwhile, in the throes of a monumental energy crisis brought on by climate change and poor resource management. It is entirely possible, then, that the IMF will end up declaring Uganda “off-track,” which would be a serious embarrassment for the credibility of the PSI. It would also be reminiscent of the IFIs’ experience with the Heavily Indebted Poor Countries (HIPC) debt management program. Uganda, ever the good IFI student, was chosen as the first country to benefit in 1998; in less than a year the hollowness of HIPC was exposed as Uganda’s debt was again declared “unsustainable,” and it was run through the program a second time.

So why did Uganda get a PSI instead of a regular IMF loan program? As the regular star performer in Africa, it was probably looked to out of habit by the IMF staff as a safe choice, disregarding recent political and economic trends. And Museveni himself has staked some of his reputation on being at the forefront of new IFI programs. The biggest factor, however, was probably the presidential elections in February. By signing up for the PSI, Museveni was able to tell Ugandans that he was moving the country forward into a new, innovative program, and had managed the economy so well that the IMF agreed it no longer required IMF loans. The PSI, in other words, appears to be a sort of prestige program – moving from a tricycle to training wheels, if you will. If only the end result were as promising as a smooth ride on a fast bike!

Playing it Safer: Cape Verde

The tiny African island-nation of Cape Verde, in the Atlantic Ocean west of Senegal, was the third country to agree to a PSI, in May 2006. Cape Verde was not one of the countries to benefit from the MDRI debt cancellation. It is, in fact, more clearly what the IMF would describe as a “mature stabilizer”. The original documentation describing the PSI made it sound like it was not designed for HIPC countries (which one must be in order to benefit from the MDRI), since most of them have had recent difficulties, if not with accepting the IMF’s economic policies, then with keeping their economic indicators in balance. Cape Verde could reasonably be said to be the only PSI country that meets the description of the PSI candidates offered by the IMF.

Tanzania: Prestige without Dollars

The most recent country to commit to a PSI is Uganda’s neighbor in East Africa, Tanzania, with the announcement coming in mid-June. Initial reactions in the press were ambivalent, with at least one reporting casting it as an IMF decision to “delist” Tanzania from eligibility for IMF money.

Like Uganda, Tanzania relies on donor funds for about 40% of its budget, so financial reporters could perhaps be excused for reacting with some alarm to the announcement of the no-loan program, particularly since the Tanzanian government did not seem to trumpet it as an achievement right away.

It appears that the Tanzanian finance minister was waiting for “budget day” – June 16 – when the three East African Community finance ministers (Tanzania, Uganda, and Kenya) unveil their proposals to their respective parliaments. Then she was upbeat about the achievement, pointing to the fact that it would mean fewer IMF missions coming to the country. Her counterpart in Kenya, a country which protested at its exclusion from the MDRI, complained about frequent IFI interventions, and said that he would like for Kenya to join its neighbors in moving to the PSI once its current program with the IMF expires.

Tanzania is not faced with the immediate challenges Uganda is, and thus might be counted a less controversial choice for inclusion in the PSI. Indeed, it is one of the most stable countries in Africa, and despite its socialist past has won consistent praise from the IFIs over the last ten years.

But the media was not ecstatic about the development, with the EastAfrican ignoring the official IMF vocabulary and describing the PSI by saying that “rather than provide financial support, the IMF’s role will be more or less that of an international credit rating agency that tells other donor agencies whether or not to lend to Tanzania.” That excellent summary was followed by the conclusion, “Thus, even without receiving IMF funds, the country will still be subject to IMF conditionalities.” Exactly.

And lest anyone get the idea that the PSI is more relaxed about its conditions than other IMF programs, East African Business Review reports that the IMF’s resident representative says that Tanzania will be “required to update her energy sector policy and redesign its economic policy to qualify for PSI for a two-year period." Just how the country’s economic policy is to be “redesigned” has not yet been revealed.

Meanwhile Tanzania, one of the MDRI beneficiaries, is protesting to the IFIs about the outcome of their recent “debt sustainability analysis” for the country. It seems that after having most of its multilateral debt cancelled, Tanzania is in danger of no longer being included on the World Bank’s list of countries that should get grants instead of loans. Perhaps the Tanzanian government should consider going the same route with the Bank that it is proud to be taking with the IMF – no more loans. That may mean less revenue, but it would also mean less of the dangerous, conditioned entanglements with the IFIs. Surely the Finance Minister could get some mileage out of promising fewer visits from the World Bank as well.

What Does It All Mean?

The PSI has not taken the strong role one might have expected it to in the wake of the MDRI. Most of the countries involved had ongoing IMF programs; a few have entered into negotiations for new loan programs. There has not yet been a rush to become liberated from the IMF – at least not explicitly. It is unclear, for example, whether Ethiopia is going to come back into the fold, or whether it is content to maintain its ambivalent position with the IMF – in dialogue, but without a formal program.

The one MDRI country that has declared its independence is Bolivia, under its new left-wing president, Evo Morales. The IMF has greeted this news by assuring Bolivia that it is willing to help at any time. In Ghana, there has been some prominent advocacy for making a break with the IMF now that the MDRI is concluded. But the president, a confirmed neo-liberal, has opened negotiations on a new agreement. We can hope that domestic political pressure will be strong enough that those talks will end, without even a “compromise” PSI.

Bolivia shows, then, that a break is possible. It appears, however, that thus far the only political step other countries that received debt cancellation are willing to take is to use the PSI as a political point of pride – they can boast that they are making progress in weaning their countries from the IMF. But in fact the conditions remain the same, and just as strong. The PSI may be more useful for cowardly governments that want to project an image of independence than it is for the IMF, which is apparently not yet facing a mass “breakout” by MDRI countries.

From the IMF’s side, what does the PSI mean? Why is it apparently willing to offer it to any country that asks for it? Is it even possible that it is encouraging countries like Tanzania to use the PSI instead of getting new loans?

Since December, the IMF has been reeling from the news that most of its biggest “debtors” – Brazil, Argentina, Indonesia, Turkey – and some of their smaller ones (Uruguay, Serbia) are paying off their loans early. Presidents and Finance Ministers are celebrating the end of having to obey IMF rules. And the IMF board and staff are worried that its lending business is about to dry up. New committees have been meeting, the G8 has weighed in, and the head of the IMF now spends all his time talking about the IMF’s new mission, as a broker of agreements among the major economies in the quest for global economic balance.

The IMF, then, may be resigning itself to its new identity – technocratic advisers and economic diplomats. They may be weaning themselves from their self-image as lenders. Everything will be collegial – the PSI documents all emphasize that the program is “voluntary and demand-driven.”

But for Southern countries not much will have changed, even if they are no longer “borrowing countries” – at least not so long as the PSI is available to enforce the IMF’s power even without cash. It looks as if opponents of the IMF’s economic vision will have to work even harder to demonstrate that the power dynamics have not changed, that the IMF is not a benign group of expert advisers, that it’s not as simple as the phrase “voluntary and demand-driven” would suggest, and that the majority of the people in the Global South are still being set up to be exploited and impoverished by the global economic system.