IMF Conditionalities Could Hurt Teachers’ Salaries

published 22 June 2009 updated 22 June 2009

A report released by the Global Campaign for Education concludes that IMF-loan conditionalities might put downwards pressures on public wage bills, in turn affecting teacher’s salaries. This conclusion is shocking in a time in which the world is facing a shortage of 18 million teachers to achieve universal primary education for all. The IMF policies particularly affect low-income countries, as well as some developing countries, which are receiving loans to fight their way out of the financial and economic crisis.

Meanwhile, the Managing Director of the International Monetary Fund (IMF), Dominique Strauss Kahn, told his Executive Board last week that the ‘IMF has played a central role in helping member countries cope with the financial and economic crisis’ and that it is ‘ready to continue these efforts’. Indeed, after the G20 Summit in London, in April this year, it became clear that the IMF would be given a bigger role to battle the crisis. Its funding would be increased in several ways, including gold sales that would be beneficial for low income countries. However, more and more doubt is cast on the contribution by the IMF to development of these countries. The report makes clear that, in the education sector, the efforts of the IMF could actually be very harmful.How are teachers’ salaries affected?

  • Public Wage Ceilings In the past, loan agreements between the IMF and governments often included public wage ceilings (a limit on government spending for civil servants), sometimes directly targeted at teachers’ salaries. Although these type of public wage ceilings are slowly disappearing, it is still unclear if the ‘reformed’ IMF will definitely abandon this feature in its agreements.
  • Aiming for Single Digit Inflation The IMF argues strongly that inflation targets of over 10 percent will hurt the poor because basic consumer goods will become too expensive, potential investors might be scared off and future economic growth undermined. In order to keep inflation low, the IMF argues for constraining the money supply within countries. The report notes that when governments increase spending on the wage bill, either by hiring new employees or raising salaries, it is in effect putting more money into people’s pockets and into circulation within the money supply economy, and risks jeopardizing the IMF’s strict monetary policy targets. Furthermore, this is a route actually taken by many South East Asian countries in previous decades.
  • Fiscal Deficit Reduction Targets Many agreements contain targets for reducing the deficit in public budgets. At a time when public budgets are contracting because of economic decline, this in effect often means a reduction of public sector wages. The report mentions that as an example, Latvia’s recently approved Stand-By Arrangement with the IMF includes a ‘fiscal adjustment’ program which will see the wage bill go down drastically from 1.3 percent of GDP in 2009 to 0.4 percent in 2010. Moreover, while low deficit spending is generally a helpful policy in order not to constrain future government spending, deficits spending can be useful in battling economic crises, as the behaviour of many developed countries shows.
  • Building Foreign Reserves Another route the IMF promotes to developing countries is to build up reserves of foreign currencies, making significant demands on available sources of available sources of foreign currency. In effect, this can cause strains on development aid, being a major source of foreign currency. Already, the IMF has found that aid is being used in this regard, which can further harm education budgets.

The report continues with a number of recommendations towards the IMF, the G20, member states and civil society actors in order to deal with these problems. In particular, the IMF and member states should abandon loan conditionalities, while giving more priority to education spending as the smart way to handle the crisis. Education is on the Brink. The full report is available for download on the Global Campaign for Education's website.