The impetus for the IMF strategic review has come as much from pressure to reform the institution as from a crisis in its finances. This stems from early repayments by its biggest borrowers, Brazil and Argentina (see Update 49).
Now Indonesia, currently the second largest debtor to the Fund with nearly $8 billion outstanding, has promised to repay half of the country’s outstanding debts this year, with the balance to be settled in 2007. The Bank of Indonesia indicated it may even repay the second half of the debt before the end of 2006, at least 5 years earlier than the projected date for full repayment. This is despite a devastating earthquake hitting the country just 15 months after the tsunami that struck at the end of 2004.
will the Fund be good at implementing austerity programmes in-house?
Smaller countries are also joining the trend. In May The Statesman newspaper in Ghana reported that the government there would exit its IMF-supported poverty reduction and growth facility programme by October, repaying its loans because IMF fiscal constraints prevented the government from borrowing in private markets. Serbia announced its intention to repay its debts of $983 million to the IMF earlier than expected. It was reported on 16 May that the country had indicated its intention to the IMF, but that the exact details of repayment are still to be worked out, pending the resolution of the division of debts after Montenegro’s decision to split from Serbia.
This would leave the Fund with less than $20 billion in outstanding credits, its lowest in over 20 years. Just three years ago it had nearly $100 billion in outstanding loans. The bulk of the remaining credits is lent to Turkey, where there has also been discussion of early repayment. Academics Devesh Kapur and Richard Webb state in a paper for a March G24 meeting, “The de facto exit of its clientele, driven by the combination of high political costs associated with Fund borrowing and growing availability of alternatives, now poses an unprecedented challenge for the Fund, in particular on its income.”
Facing this growing budget gap, the managing director drafted a committee of international experts, including former US Federal Reserve chairman Alan Greenspan, to advise the organisation on its finances. The committee, comprised of central bankers and senior management from private sector investment banks, is tasked with advising the Fund on possible sustainable sources for financing its administrative and surveillance expenses. They are expected to report back in the first quarter of 2007.
In addition, the Fund established an investment account. Instead of funding all of its administrative expenditures out of fees and interest on lending, the IMF plans to earn income by investing a portion of its reserves in government securities. The irony is that the nearly $9 billion in reserves can only be invested in government securities denominated in the 4 reserve currencies – the dollar, the euro, the pound and the yen – meaning the Fund will be helping, in part, to underwrite the very current account imbalances in the US that it should be working to resolve. The Fund is also reportedly instituting a one-off adjustment to its salary scale as part of its efforts to rationalise its finances. One wonders whether the Fund will be as good at implementing austerity programmes in-house as it is in designing them for its borrowers.