Saddling the South: The IMF and the perverse logic of exogenous sacrifices

The US–Israeli assault on Iran has triggered a cascade of crises: energy prices have surged, maritime navigation disrupted, investment flows thrown into disarray, and tourism brought to its knees. The IMF’s response? A demand that Egypt accelerate its privatization drive to generate the financial inflows needed to absorb the fallout of war.

The IMF’s recommendations reflect the global financial system’s enduring disposition to offload the burden of adjustment onto the countries of the Global South; even when the shocks in question are entirely exogenous to them. We bear no responsibility for decisions to go to war, nor for the decisions of oil-exporting states to raise energy prices, nor for the Federal Reserve’s decision to hike interest rates, which drives up the cost of financing everywhere in the world.

At its core, Egypt’s case illustrates a recurrent pattern that has afflicted indebted, oil-importing low- and middle-income economies since the 1970s. Time and again, these economies are compelled to absorb sacrifices; interest rate hikes, austerity, currency devaluation & privatization, which the IMF markets as the only available remedy for crises these countries played no part in creating.

External shocks, internal adjustment

Every crisis that drove Egypt to seek the IMF’s assistance over the past decade originated beyond its borders: the Covid-19 pandemic, the Russian war on Ukraine and its knock-on effects on food prices, and the American monetary tightening cycle. As a lower-middle-income country trending downward, a net energy importer, and a fossil-fuel-intensive economy, Egypt is structurally vulnerable to swings in global energy markets.

This vulnerability has deep historical roots. The 1973 oil embargo sent energy prices into a violent spiral, sharply inflating the import bills of oil-importing countries. The 1979 crisis compounded these pressures. Then came the Volcker Shock of the early 1980s, when the United States raised interest rates to 20% to stamp out excess inflation. Oil-importing countries, already indebted in the aftermath of 1973, faced a double blow: soaring energy prices colliding with soaring debt-service costs simultaneously.

The result was what came to be called the Latin American debt crisis, which was, in reality, a debt crisis engulfing the entire Global South, and it was in response to this grinding emergency that the IMF’s Structural Adjustment Programs (SAPs) were devised.

In the contemporary moment, the Covid-19 pandemic, the Russia-Ukraine war, and the war on Iran have reproduced the same mechanism: global energy price inflation, supply chain disruption, and a tightening of international financial conditions have once again swollen import bills, eroded foreign exchange reserves, and put exchange rates under pressure. The pattern repeats across time: exogenous energy-related shocks transmuted into domestic balance-of-payments crises in economies that bear no responsibility for the forces driving them.

The paradox is that the solutions the IMF proposes for meeting these crises themselves generate further crises. Exchange rate flexibility produces severe inflationary pressure. To contain that inflation, the IMF recommends interest rate hikes, which drive up the cost of public debt. Yet interest rate instruments fail to curb inflation precisely because that inflation is driven by rising global energy prices rather than excess domestic demand.

In low and middle income economies, consumption of essential goods accounts for the largest share of GDP: which means that raising interest rates will not suppress demand for those goods, and therefore will not arrest their price inflation.

Acknowledgement without action

The IMF’s prescriptions are rooted in SAPs, originally designed on the premise that the problems afflicting crisis-struck economies originate in flawed domestic decisions, not in shocks beyond their control. One of the rare attempts to illuminate this contradiction came from Sidney Dell, a UN economist, who in the early 1980s challenged the logic of saddling debtor countries with painful adjustment measures to contain problems like energy price inflation and external price shocks, while the surplus countries responsible for producing the crises faced no demands from the IMF to “adjust.”

Dell further argued that most adjustment mechanisms available to debtor countries actually worsen their terms of trade. Currency devaluation may expand export volume, but the decline in unit export value may outstrip the overall volumetric gain; limiting any positive balance-of-payments impact while simultaneously exhausting natural resources through surplus extraction.

Egypt’s experience over the past decade reflects this dynamic precisely: crises begin with rising global energy prices, proceed through the flotation of the pound, and end with falling export prices and rising import prices, deepening the balance-of-payments deficit further still.

The telling detail is that the IMF’s own reports have historically acknowledged all of this. The 1979 IMF Annual Report noted that widening current account deficits in "non-oil developing countries" were attributable to external factors beyond their control — deteriorating terms of trade and rising interest rates. On page 22 it states:

“Of the $22 billion increase [in current account deficits], about $16 billion is attributable to a deterioration in the terms of trade of these countries… while about $6 billion is likely to reflect an increase in net interest payments and other forms of investment income. These factors are pre-empting borrowed funds without adding to the real flow of external resources for development.”

A 1974 IMF report had gone further, concluding that the responsibility for addressing inflation ought to rest principally with higher-income countries: “Since the problem of inflation is worldwide, it can be expected that all countries will contribute to its solution. But because of their weight in the world economy, the major responsibility in this regard falls on the industrial countries.” The same report warned explicitly of the dangers of any adjustment process confined solely to oil-importing countries, calling instead for resolution “within an international framework,” noting that “the stakes involved in achieving a successful adjustment are unusually high.”

The gap between these acknowledgements and the institution's actual practice is, in itself, an indictment.

What would a genuine stabilizer look like?

The IMF presents its programs as a pathway toward long-term stability, even if the short-term social cost is steep. Yet the accumulated record suggests that rather than reducing these economies' vulnerability, such policies frequently deepen their exposure to external shocks.

Currency devaluation renders the task of securing basic needs — food, energy, domestic employment — hostage to fluctuations in global prices, while simultaneously eroding terms of trade, making exports purchase progressively smaller quantities of imports over time. Persistently elevated interest rates achieve, at best, a transient calming of currency markets — at the cost of investment, production, and domestic demand — and are typically followed by rapid capital outflows the moment global financial conditions shift, reconstituting the very cycle of instability they were meant to arrest.

If genuine stability were the objective, the approach would have to proceed from an entirely different logic. What is required is not merely that countries adapt to the volatility of the global system, but that the amplitude and frequency of that volatility itself be reduced. This demands a different role for the IMF: one oriented toward supporting balance in global trade and more stable international exchange rate arrangements, of the kind the IMF itself maintained in the post-war era, when it promoted fixed exchange rates and deployed rescue packages in support of currency stabilization.

It also requires deepening domestic markets through wage-enhancing policies that bolster internal demand, reducing excessive dependence on volatile export sectors; and using interest rate policy to support productive investment and ease debt burdens, rather than merely as a lure for short-term capital flows.

Beyond monetary and fiscal measures, building genuine resilience means restructuring the growth model itself — reducing energy intensity in production through investment in public transport, labour-intensive sectors like healthcare and education, and urban planning that reduces car dependency, all of which attenuate exposure to global energy shocks.

Ultimately, achieving durable long-term stability hinges on the IMF’s transition away from offloading its burden onto crisis-ridden debtor countries — countries carrying chronic trade deficits for which they bear no responsibility — and toward a genuine confrontation with the structural pathologies of the global financial system itself.