The IDB and the EWI

Tuesday, May 06, 2014    

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THE recent decision of the Inter-American Development Bank (IDB) not to finance the Energy World International (EWI) 381-megawatt project brings into sharp focus the role of international financial institutions (IFIs) in developing countries.

The International Monetary Fund (IMF), the World Bank (WB) and the Inter-American Development Bank (IDB) are examples of IFIs which are integrally involved with Jamaica.

The IMF lends to countries which are experiencing economic difficulties, with the objective of the stabilisation of the macroeconomic fundamentals such as inflation, the exchange rate, and the fiscal budget deficit leading, hopefully, to economic growth. Its loans are accompanied by and conditional on adhering to a programme of policy measures designed by its technicians.

The World Bank lends to developing countries to promote their economic development. It provides two kinds of loans: investment loans for building roads, etc; and policy-based loans to assist in structural adjustment. These loan facilities are invariably accompanied by policy advice from its technical staff. The IDB has a similar role to the WB.

These institutions have a long history of differences over policy with the governments of the countries that borrow from them. Governments often find their policy advice — sometimes with justification — to be inappropriate, politically onerous, reducing their sovereignty, and foreclosing their policy space.

But IFIs can be invaluable to governments by insisting on policies measures which are economically painful, but unavoidable, and politically challenging, but necessary. Some governments find it convenient when the IFIs are blamed for the unpleasant repercussions of policies the government would have to execute with or without the IFIs.

Moreover, the technical advice of the IFIs serves a useful purpose because their recommendations are taken as best practices based on their international experience over time and across a wide range of developing countries. Their views are respected and listened to by governments, international organisations and international financial markets.

IFIs have to satisfy the donor countries that contribute funding and, because they are spending other people's money, they have to be extremely careful or risk not getting funds.

When a government decides to ignore or oppose the standards applied by the IFIs they are signalling to the world that they do not intend to meet internationally accepted standards. This type of action is financially and reputationally detrimental to a country.

In the case of the IDB, the contributing countries are extremely strict on (1) the purposes for which their money is lent, (2) the standards upheld by the borrowing country, including non-economic factors such as human rights, and (3) very importantly, that the process of decision-making about lending meet the highest standards of transparency.

If the management and technical staff of the IDB decide that it cannot to provide financing to a particular project, in this case the EWI project, it is applying standards which emanate directly from the mandates governing its lending operations.

Jamaica has received hundreds of millions of dollars from the IDB over the last six years. We should therefore be careful not to cast aspersions on their conduct because they disagree with our decisions.





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