IMF’s response to crisis “inadequate”

12 September 2003

A new report by the IMF Independent Evaluation Office (IEO) highlights mistakes in the handling of financial crises Indonesia, Korea and Brazilin the late 1990s .

The report questions the Fund’s growth projections and assessment of macroeconomic conditions for these countries. Some shortcomings in the management of the crises are also identified, although in the case of Indonesia the IEO argues that failure was due to insufficient implementation of the IMF programme. However part of the blame is attributed to the Fund for the “devastating outcome” of the crisis, as its response to the failure was “inadequate in many respects”. In the case of Korea the report concludes that IMF surveillance failed to identify risks and “was optimistic until virtually the last minute”. The report admits that “in retrospect” the fiscal tightening in the adjustment process was unnecessary, as IMF staff have themselves concluded.

The IEO points at IMF mistakes but this is largely limited to timing and ‘dosing’ issues and the extent to which policies were actually implemented, rather than the nature of these policies. However some general lessons are drawn on the shortcomings of the Fund’s surveillance and projections, the lack of incentives for the staff to express frank judgments over a country’s prospects, the interference of major IMF shareholders or coordination with other institutions, as in the case of the World Bank in Asia. The IEO makes a number of recommendations to address these problems, including:

"in retrospect" the fiscal tightening in the adjustment process was unnecessary

-Increasing the effectiveness of pre-crisis surveillance, for example through “stress-testing approaches” or by seeking dialogue in countries beyond senior economic officials;

-Assessments of a country’s situation should be made more accurate and candid, for example by seeking second opinions from outside the IMF or providing appropriate incentives and skills to staff;

-A comprehensive review of programme design in crisis situations should be carried out to allow more flexibility.

The IEO has invited comments on the 250-page report. The IMF Board supported many of the recommendations but rejected some (such as second opinions) and argued that a great deal has already been done to translate the lessons of recent financial crises into Fund policies and practice. But Tae-Shin Kwon, South Korea’s Deputy Finance Minister, said that some major questions remain unanswered, such as whether the Fund has the financial resources to cope with future capital account crises and how private banks can be involved in their resolution through standstill agreements.

The IEO will be able to examine these issues in even greater depth when it studies the Fund’s role in Argentina from 1991 to 2001. It has invited substantive contributions until the end of 2003