The dilemma Latin America faces when it comes to using IMF assets (and the cases of Argentina and Mexico)


Once the most devastating effects of the covid-19 pandemic were overcome, governments in Latin America and the Caribbean – one of the regions most affected due to restriction measures amid the health contingency – have pledged to consolidate the recovery of their economies.

The decision of the International Monetary Fund (IMF) to inject liquidity into the world economy, by issuing $ 650 billion in Special Drawing Rights (SDRs) – an international reserve asset created in 1969 to supplement holdings reserve of member countries – in August of this year, it meant “action in response to the global crisis,” say experts consulted by MRT.

In the case of Latin American and Caribbean member countries of the Fund, the SDR allocation was equivalent to $ 50.3 billion. The use of these resources sparked controversy in several countries in the region and their fate eventually became a “political battle”.

In countries like Mexico, monetary authorities, as well as pressure groups linked to the financial sector, insist that these funds cannot be used by the López Obrador government. “They are the property of the central bank”, they say, because they are assets which “form part of the international reserves”.

In Argentina, the debate revolved around the urgent need to direct resources towards the basic needs of the population. Instead of strengthening the reserves of the central bank, or disbursing them for the payment of debts contracted with the IMF and the Paris Club, the SDRs allocated to the South American nation should be oriented towards “alleviating the social crisis”, instead of “calming down the financial markets,” say researchers specializing in international economics and finance.

“Faced with the economic and health emergency, the priority is people”

Argentina was one of the most vulnerable countries in Latin America when the COVID-19 pandemic took its first toll on the global economy. The Alberto Fernández administration was promoting a stimulus program in the areas of employment and investment, when confinement was imposed. As a result, the little that could have been recouped in macroeconomic matters during the first months of government was thrown away.

The SDR’s allocation of $ 4.334 billion has sparked debate both inside and outside government. In view of the worsening economic crisis, social movements and a group of lawmakers from the Frente de Todos coalition called on the national government to use the resources for social investment.

Instead of using them to repay IMF and Paris Club debt, the majority group of senators from the ruling party —Through the Budget and Finance Committee – summoned the government of Alberto Fernández to direct resources towards “serious social problems” Argentina, that is to say investing them in the sectors of health, education, housing, job creation, etc.

As the economy collapsed, lawmakers called on the government to do not use IMF assets to cancel maturities this year with the multilateral organization.

Jorge Marchini, professor at the University of Buenos Aires (UBA), warns that the government must take into account that the country is going through a “state of necessity”, that is to say a situation of “deep crisis” and that, therefore, it must “safeguard the best interests” of social life.

There are two conflicting views regarding the use of SDRs: one that commits to increasing international reserves to increase “confidence” in international markets; and one that seeks to promote the recovery of the “real economy” and meet social needs.

So that, also assures the coordinator for Latin America of the International Debt Observatory, when renegotiating payment conditions with the IMF or when formulating a new recovery plan, “The government must put the basic needs of the population first, before complying with the demands of the creditors”. “In the midst of an economic and health emergency, the priority is people,” he says.

Marchini maintains that in the continent there are two visions found through the use of SDR. On the one hand, that which undertakes to increase international reserves and, consequently, to increase the “confidence” of international markets. And, on the other hand, the one who seeks to promote the recovery of the so-called “real” economy and to meet social needs, for example, the purchase of vaccines against covid-19.

“Unfortunately, the pressure of international markets on Argentina is such that the vision of using the SDR to pay two installments of repayment of credit to the IMF prevails, which is, in fact, strongly questioned by the way in which it was acquired by the above government (by Mauricio Macri). In the future, it seems to me, we need to discuss the financial conditions of Latin America again, what we are going to do to promote the recovery of our economies, or even propose a modification of multilateral organizations. “

“Dogmatism prevailed in Mexico”

Upon the announcement of the amount of SDRs to be allocated to Mexico, equivalent to approximately $ 12,117 million, President Andrés Manuel López Obrador (AMLO) proposed that they be used to pay off high interest rate debts.

From the first moment, however, the president received criticism of the press specializing in financial matters, who argued that the IMF’s assets were not resources available to the government, but the property of the central bank: Banco de México.

The monetary authorities of the North American nation were not left out and questioned the president’s intentions. Gerardo Esquivel, deputy governor of the Bank of Mexico, posted on Twitter in early August explaining that the SDR, “being an international reserve asset, could not be used to pay off debt, by warrant of law.”

The position defended by Esquivel and other Banco de México authorities is, however, “false”, according to the point of view of Andrés Arauz, an economist specializing in international finance and who was Ecuador’s representative to the Banco del On during the government of Rafael Correa. .

The former presidential candidate also points out in an interview with MRT that the monetary authorities questioned President López Obrador on the basis of “confusion” in the interpretation of the law. Arauz explains that One thing is the concept of “international reserve assets” and, another thing is the “ownership” of them..

“For example, if Petróleos Mexicanos (Pemex) sells oil and receives dollars in exchange and then deposits them at the central bank (Banco de México), those dollars remain the property of the oil company. However, as they are deposited with the Bank of Mexico, they in turn form part of the international reserves. The same is true in the case of DTS. “

It is that in legal terms, he explains, SDRs belong to IMF member countries, in accordance with Articles XV and XVII of the Agreement establishing this multilateral organization. And because it is an international treaty, the Agreement Establishing the Fund is above all national legislation, including that governing a central bank.

In the midst of one of the most severe crises in the past 100 years, great resistance remains from financial elites for governments in the Latin American region to use IMF assets to alleviate the social crisis.

Arauz insists that, as Mexico is a member of the Fund, SDRs belong to the Nation and not to the central bank. So that, he assures, the Ministry of Finance and Public Credit could well have used the reserve assets of the Fund.

Government of Mexico, However, finally gave in to the pressure and ended up buying $ 7,000 million from the Bank of Mexico in mid-September, instead of using the assets allocated to it by the IMF to pay off high-interest debts, or as stimulus tax.

“Unfortunately, Mexico’s monetary authorities have misinterpreted their law to assert that SDRs belong to the central bank and therefore if the Ministry of Finance and Public Credit wants them it has to buy them, when in in reality they are SDRs. belong to the country and can therefore be used for the good of its people. “

For Arauz, the case of Mexico only reflects the persistence of a “dogmatic vision” among the authorities of its central bank, an interpretation of the law which, he assures, is “functional to the power held by the capital. international finance ”.

Controversies in Mexico and Argentina are growing in importance in light of the possibility of further issuance of SDRs by the IMF to support the recovery of the global economy.

However, in the midst of one of the most severe crises of the past 100 years, great resistance remains from financial elites for governments in the Latin American region to use IMF assets to alleviate the social crisis.

Andrés Arauz concludes that, fundamentally, the debate around the use of SDRs is a “political” question, since the fact that Latin American governments use these resources, “It would increase your bargaining power” against investment banks, risk rating agencies and other financial institutions.

Ariel Noyola Rodriguez

@noyola_ariel

Disclaimer: This article is generated from the feed and is not edited by our team.


About Meredith Campagna

Check Also

Gold down, poised for first weekly gain since April on growth concerns

By Gina Lee Investing.com – Gold was down on Friday morning in Asia but is …