How IMF Turned The World Against The British Pound

(MENAFN- Asia Times)

Everyone from Political pundits to people on the street have issued forth on the new UK government's tax cut-laden growth plan recently. But it was a from the International Monetary Fund (IMF) that really impacted financial markets.

Days after the government made its mini-budget announcement, the IMF that“large and untargeted fiscal packages” could work at“cross purposes” to monetary policy, referring to current efforts by central banks around the world to fight .

It also suggested the government should reevaluate its tax measures and provide more targeted energy crisis support at its next budget, currently scheduled for November 23.

Investors by beating an even hastier exit from government bond markets and sending the pound plummeting. Within hours of the IMF statement, the Bank of England had to try to calm the markets.

The IMF's decision to comment on UK tax policy was significant and clearly had an impact on traders and investors. And while the uninitiated may be blissfully unaware of the IMF's existence, it has played a key role in supporting economies in trouble since the middle of the last century.

The IMF was established in 1944 at the Bretton Woods Conference, which sought to stabilize global finances after the second world war. Based in Washington DC, it is an international organization with – from Afghanistan to the UK and US, right through to Zimbabwe.

Its mandate is to uphold international financial stability, which it tries to do by monitoring global macroeconomic developments and providing governments with advice and on economic policy management.

Most importantly, perhaps, the IMF frequently acts as a“lender of last resort” for its members. This means it provides countries in dire financial straits with much-needed money in the form of loans.

In return, these countries must agree to certain austerity measures. Depending on the situation, this can include hikes and drastic spending , alongside other substantial economic .

In the last few years, governments in and , among others, have hiked interest rates, cut back on public spending programs, and reduced subsidies on household essentials such as fuel and food to meet the IMF's performance criteria. As a result, the IMF has become one of the world's most organizations.

Since the performance criteria it uses are based on the IMF's worldview, the question of whether its advice is adequate, proportionate, and effective is often subject to debate.

For IMF , the sometimes draconian measures it mandates are necessary to restore investor confidence, boost economic growth and help countries become more competitive in the long run. As such, the IMF can work like a for a country's policy plans, helping governments to shore up international confidence in their economies.

To its critics, the IMF has used its policy leverage to advance reforms that have increased and , leaving countries with deep social and political scars for years after accepting its help.

For example, during the Ebola crisis in 2014-15, the IMF was for contributing to underfunded health systems that prevented effective government responses to the epidemic.

Regardless, as the recent case of the UK shows, an IMF verdict on government policy proposals can significantly financial markets. For countries with immediate financing needs – typically developing economies – restoring investor confidence with an IMF intervention can be to the successful resolution of financial crises.

But the IMF has also used its“magic shield” to rescue UK governments from global financial woes in the past. In fact, since the Fund's creation, the UK has called upon the IMF 11 times.

Its last happened in 1976 when stagflation and political stalemate forced the UK government to ask for a loan to halt speculative pressures on the British pound. The IMF provided not only financial relief, but also stability to a newly elected British administration by helping to calm market nerves about the UK economy.

This time, the IMF offered up its thoughts on the current economic situation in Britain, rather than being invited to intervene. But instead of curbing speculation about the UK's financial viability, the statement had the opposite effect: markets panicked.

Mortgage lenders continued to and investors kept , forcing up yields and the cost of government borrowing. Add the in the mix and the current situation is in danger of becoming a textbook financial crisis.

But the IMF's assessment is in line with and in doubting that tax cuts will help reignite UK economic growth. Instead, it argues that the cuts will further expand the budget deficit.

Without a sound fiscal plan, this will increase the need for new government debt. At a time of rampant inflation, deteriorating global economic conditions and rising interest rates – which affect the cost of financing for the government – such debts may become unsustainable for the UK.

Taking into account the reaction of market participants to the IMF's statement, and that the Bank of England felt the need to intervene in the bond market afterward, the IMF assessment seems to have carried weight.

Certainly, the UK in debt distress is the last thing the world needs. Many governments in developing and emerging markets are to keep their own economies afloat right now while awaiting financial relief from Western banks and the IMF.

But the UK's means any panic in the City of London can spread quickly to global financial markets. From this perspective, the IMF's recent comments about the UK can be seen an attempt to prevent the world from slipping further into a winter of despair.

is Reader in Politics, and is Associate Teaching Professor, McCourt School of Public Policy,

This article is republished from under a Creative Commons license. Read the .

MENAFN03102022000159011032ID1104958686