HM Treasury Civil Society Meeting: ED, Treasury and DFID Officials
Alex Gibbs, UK Executive Director to the IMF
Tom Duggan, Advisor on IMF, handling low-income countries
Shona Riach Director of International Finance
David Sandford IMF policy advisor
Azin Pourghazi IMF policy advisor
Umair Choudhry, International debt, HM Treasury
Oliver Keetch Deputy Head of IFID, DFID
Eva Bachtsetzi, Economic Adviser, Leads on IMF issues, DFID
Civil Society Representatives
Tim Jones, Jubilee Debt Campaign (JDC)
Emma Seery, Oxfam GB
David Mcnair, Save the Children UK
Peter Chowla, Bretton Woods Project
Sargon Nissan, Bretton Woods Project
Bandula Kothalawala, TUC
Notes from Discussion
Shona Riach, HMT: Welcome. Prior to going through agenda items, would like to share the key topics currently being addressed, including in lead-up to and at annual meetings. These include
- World Economy
- IMF Quotas and Governance reform (including the formula review spanning from January 2013 to January 2014), including the intention to ensure that the poorest countries’ voice is protected.
- Gold sales – note that the UK’s voice was instrumental in the decision
The meeting invitation was partly prompted by July’s letter to Michael Ellam (HMT) from Oxfam GB and Save the Children UK.
Agenda Item 1: Concessional Lending and LICs, Poverty and Inequality issues
JDC: In considering the recent review and in particular the gold sales decision: while welcoming the extension of concessionality per se, there exist concerns that the IMF may be becoming a long term lender in some LICs. Is the IMF becoming a general development lender?
Alex Gibbs: This is an important issue, but there is no appetite among shareholders to reinvent the organisation as a development lender with longer term engagement. However, depending on varying country circumstances, the Fund can provide technical assistance and other support over a longer period than that of a standard program in vulnerable countries. The evidence reported as part of the LIC review shows that longer than usual Fund involvement in LICs has helped them build capacity in this way. The key aspects to consider are the circumstances and context. This sort of involvement is consistent with the Fund’s mandate and should not be taken as evidence of a change in its mandate in developing countries.
JDC: A question to pose to IMF staff may be whether the impact on deficits in the long term of conditions attached to lending; are short term positive outcomes associated with increased long term vulnerability. Therefore how sustainable is the idea of ‘success’ is it built on vulnerabilities that are not being picked up.
Alex Gibbs: Given the scale of time being analysed, it can be hard to define and assess. The Fund is highly aware of risk issues as their response in the crisis’ initial phase shows. The evidence is that the Fund was able to help countries pursue counter cyclical policies for a period. But the crisis continues and vulnerabilities remain, which raises the question of how to build up precautionary buffers.
Returning to the issue of long term engagement, I would challenge the suggestion that the Fund is comfortably resourced to launch huge programmes for years to come – demand projections themselves show that while the news on gold sales is very welcome indeed, resource constraints will bite soon. Handling this is one of the key issues raised by the LIC review which made a number of proposals. Civil Society input on the trade offs involved when resources are constrained would be welcome.
Oxfam: Relating to the advice and financing of the Fund, preliminary findings of a study on LICs fiscal holes shows dramatic increases from 2009-2010 to 2011-2012, and the majority of countries involved are IMF states, whose increases in state spending are far smaller than non-IMF borrower countries (0.8% versus 3.5%, respectively). The Fund was flexible in the crisis to boost spending, via less concessionality and increasing spending.
Relating to questions of poverty, we see the need for poverty assessment to be within the PRGT, and include PSIA. Additionally, analysis of the social spending floor impacts is required, as countries are revising down floors without explanation. What can be shown to be the measures of progress?
StC: Adding to that, analysis of austerity impacts on child welfare is needed, due to the implications for MDG fulfilment and beyond, we are looking to see a poverty measure, in Fund not just Bank work, hence the need for a PSIA. Related to this is the question of capital flight.
Shona Riach: These are important issues, also raised in the joint Oxfam GB and Save the Children UK letter. We are supportive of poverty assessment and the measurement agenda, but lack broad support. The IMF acting as a ‘voice’ for increased social spending is challenging, as crisis initial phase has ended. Firstly circumstances need to be considered on a country by country basis. There remain concerns over the crisis, including deterioration of the economic environment, and hence it may require greater buffers, and thus there is a difficult balancing act. As such, due to their vulnerabilities, some countries may find it inappropriate to increase spending.
As regards floors, a problem/constraint is data availability. Some country authorities have pushed back on it also. IF the Fund does develop this further, it may further erode the Fund’s remit and legitimacy, as per the discussion earlier. The Question becomes with whom should the Fund work to achieve this? Aside from internal challenges, the UK’s interest in this issue is not widely shared. All but 2 or 3 programmes since 2009 have floors, which points to the Fund’s focus on these issues. Comparing countries that have borrowed from the IMF against those that haven’t is not all that useful – there is a reason they have had a programme.
Alex Gibbs: Agree with much that was in your letter on the importance of stronger poverty impact analysis. Can you seek to build support from others too? On spending the IMF will want to ensure that policy buffers increase as the crisis has continued and vulnerabilities remain, but at the same time are committed to protecting social spending as far as possible. As regards overt impact assessment the Fund tell us that there is a real challenge with inadequate data. Similarly, country authorities often dislike an intrusive Fund focus on these issues. There is also a question about whether this is the right role for the Fund and whether the Fund has the right expertise and capacity – where in some places the World Bank and others might be better placed to take on this role.
TUC: Concerning the potential to introduce social protection globally, is there much support for it, and how much effort is being put into it?
Shona Riach: There is a significant difference between country by country and global standard setting. Support for protection does not necessarily mean seeking a global standard. Through the review we’ve pushed the Fund to look at this on a country by country basis though some chairs are concerned regarding staff resources and scope for the Fund.
DFID: The UK is at the forward-leaning end of the spectrum
Oxfam: Discussion of the IM F’s nature should not stymie debate on poverty
Alex Gibbs: There is a case to be made for a better focus on poverty impacts, which the UK is making, but there is along way to go in this debate.
Agenda item 2 Regulation of capital flows
BWP: The anticipated late October Institutional View on Capital flows and regulation, and specifically capital account management, are key moment in this debate. The recent working paper, assessing China and India, was worrying. There has been progress made at the Fund, in terms of treating capital account management and regulation as part of the toolkit, but that paper has sustained the problematic implication that the ultimate purpose of such regulation is in order to achieve liberalisation.. We would like to see an avoidance of such ideological positions, in favour of pragmatic acceptance of their value.
The Staff Discussion Note relating to the importance of spillovers and noting the importance of source country policies was valuable, though there remain concerns as to the extent to which negative spirals or currency wars over capital account management are emphasised. The findings suggest that this is excessive, and that there is a disproportionate impact not of negative sprials but of source country policiies. This debate still requires long terms refroms, but source countries can be more helpful. It dovetails with the challenges set out by the surveillance review. The UIMF’s position seems unfairly hostile to countries having the right to set their own interventions.
Shona Riach, HMT There is much to agree with, and we agree that an approach that is both pragmatic and practical is appropriate, especially given the recent environment when controls may be appropriate. The problem is if controls are used to replace proper macroprudential policy. China and India are extremely closed but they are not just recipients, also source nations. Our position remains there may be appropriate circumstances for capital controls but that the goal is an open and robust system.
As regards the Fund’s role in surveillance and spillovers: perhaps its past approach was not up to scratch, especially amongst states with large financial centres. However the IMF’s work, pushed by UK, represents a step-change and can, eventually, allow institutionalisation of changes. Your mention of source country consequences, the case of QE and QE2 in the US for example, is a really live issue. Internal analysis of existing evidence is that there is not a clear basis to say that US monetary policy causes problems in Brazil.
Alex Gibbs: would underline that determinants of capital flows are not solely the result of macro-policy, there are other fundamental factors in play. There is also the difficult counter-factual of what the consequences of the US having taken a less loose policy stance may have been. Nevertheless source country issues are clearly now on the agenda.
But how would you operationalize the idea of macro policy taking account of spillovers which are hard to measure and model with any confidence? Imagine if the UK holds rates higher to avoid a spillover, how could they do it and justify/explain it in practice? How would they analyse the impacts in practice? If an independent agency takes charge of a policy it needs to have a clear mandate – this could introduce ambiguity. Could BWP explain what is meant by a coordination role for the IMF?
BWP: We are asking for consideration of other kinds of capital account policies, not reduced to interest rate policy, and intended to manage inevitable spillovers, not ban source countries from having independent monetary policy, but using these policies to manage the consequences. Thus we envisage two roles for the Fund. Firstly, as Ostry et al (IMF working paper) showed, regional coordination would allow less intensive regulation. There is also a trust dimension, where if only the Fund took a more even-handed approach, it would provide the necessary confidence amongst emerging market nations that the Fund could act in an oversight/trusted forum role. A venue is required for coordination, and the Fund’s liberalisation bias limits its capacity to act as a broker. Hence the institutional view is crucial and a last chance.
Shona Riach, HMT: Perhaps we have to have differing viewpoints.