from Follow the Money

How quickly should a country be expected to repay the IMF?

April 3, 2005

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Brazil believes it can fully repay the IMF in 2007. That is good news indeed.

Brazil first received large sums from the IMF in 2001, got much more in 2002 and still a bit more in early 2003. So, if all goes to plan, Brazil will repay the IMF (in full) after six years. That is a longer than the three years that the IMF demands (in theory) for large-scale loans made through its crisis response facility (that facility is called the SRF). Brazil would not have been able to repay the IMF on the 3 to 5 year time frame associated with the IMF’s normal "lending facility " for smaller-scale lending (a "Stand-by arrangement or SBA) either.

Turkey, which got an far bigger IMF loan relative to its GDP than Brazil, is likely to take even longer. Full payment may happen in 2008, if all goes well -- but the IMF program currently under negotiation would give Turkey until 2010 to finish repaying the series of loans it started taking out in late 2000.

Brazil’s has not repaid even though every thing went very well in Brazil. Brazil has done its part, sustaining large primary surpluses (government revenues in excess of non-interest spending). And Brazil got lucky too: Chinese-fueled demand led to huge price increases on for its iron-ore and soybean exports; exceptionally low US interest rates which made Brazil a far more attractive investment destination than it otherwise would have been.

So why couldn’t Brazil repay the IMF more quickly, on something like the terms of the IMF’s crisis response facility? Simple: Brazil has lots of debt, mostly domestic, and relatively low reserves for an economy of its size -- it needed the IMF’s money to allow it time to grow out of an (almost) unsustainable debt burden, and to allow it time to rebuild its reserves. It was never realistic to think that Brazil only needed a very short-term loan.

The same is even more true of Turkey: without external financing from the IMF, Turkey’s domestic debt dynamics would have exploded a few years ago, and would not look that good even today. This is one of the issues Nouriel and I tried to highlight in our book on responding to financial crises in emerging economies: if the IMF to going to be used to help out (or bail out, depending on your point of view) emerging economies with far more debt than Mexico or Korea, the IMF -- realistically -- is not going to get repaid all that quickly, even when everything works well.

However, the IMF’s shareholders (led by the US, but the rest of the G-7 are also implicated) remain reluctant to recognize reality. They don’t want to align the terms of the IMF’s lending facilities with the actual lending that the IMF is doing. They prefer to pretend that the IMF won’t be making any more big loans. And if the IMF should make a large loan, they also like to pretend that such lending really can be repaid quickly and thus can be made through the crisis response facility - even the IMF is lending to countries as indebted at Turkey and Brazil.

Dream on.

It is not the end of the world if a country cannot repay on the IMF’s original terms. The IMF can always refinance. But it still has consequences. Funds lent out to one country for an extended period are not available to lend to other countries. And critics can claim that the IMF is not being true to its (stated) mission of providing short-term financial support ...

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