IFI governance

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Putting the cart before the horse

Rightsizing the IMF’s budget

20 February 2007


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The expert committee tasked with devising a solution to the IMF’s looming budget crisis proposed a set of technocratic fixes involving investing reserves and selling gold to fund an endowment, but explicitly ignored the Fund’s mission expansion and concurrent increase in administrative expenses.

The committee, chaired by US investment banker and former chairman of the Bank for International Settlements (BIS) Andrew Crockett, was constituted by the IMF’s managing director Rodrigo de Rato to propose long-term financing mechanisms for the Fund. The IMF is projected to have a shortfall of more than $100 million in the current fiscal year, rising to more than $365 million by fiscal year 2010. The committee’s mandate specifically excluded consideration of measures to reduce the Fund’s administrative expenses.

The committee’s end-January report, known as ‘the Crockett report’, characterised the Fund’s current financing arrangements as inequitable, inflexible, illogical and unpredictable. It proposed several measures to improve the Fund’s income position: expanding its investment activities using existing reserves and paid-in quota contributions; the creation of an endowment, funded by sales of the IMF gold stocks, to cover administrative expenses; and the imposition of user service charges for some of the IMF’s activities. The committee “recommends that its proposals be viewed as a package rather than as individual measures to be implemented independently from one another.”

current financing arrangements and inequitable, inflexible, illogical and unpredictable

It stressed that the Fund should avoid cross-subsidies based on a breakdown between the Fund’s major areas of activity: credit intermediation, provision of public goods and provision of bilateral services. By separating the financing of public goods (such as global economic surveillance) and services (such as technical assistance and concessional lending) from credit activities, the proposal would end the practice of the interest payments of debtors paying for the Fund’s entire administrative budget. The report also rejected the imposition of periodic levies on IMF member states and lowering the proportion of member country balances on which the Fund must pay interest.

However, the committee ignores one of the most important issues: the exorbitant costs of running an institution which is perceived by many as being illegitimate and as having exceeded its mandate. While the report did note that “spending restraint remains of central importance, and new revenue sources should not lead to the creation of new missions”, it could not recommend specific cuts in expenditure. In November, Peruvian economist Jürgen Schuldt suggested that the IMF look more closely at its own expenses and apply some of the same advice it has given to countries facing financial crises over the years: “it will have to swallow its own medicine. Self-medication will call for a drastic reduction of excess staff and, following the Peruvian lead, could cut salaries and per diems by half.”

The Crockett report’s recommendations may in the end allow the Fund to avoid that prescription. The committee’s technical fixes to the Fund’s budget crisis mask a greater problem, how to align the incentives for the Fund’s financing model with both the global public good of a stable global economic environment and a just system of paying for that public good.

Celine Tan, writing for Third World Network, commended the report for finally addressing some of the “critical asymmetries” in the Fund’s financing model, stating “that middle-income developing country members have been shouldering the costs of running the institution, including that of maintaining concessional lending facilities and bilateral technical assistance projects to low-income members, costs that should have been borne by developed country members.” Tan continues, “Developing country members have also been defraying the costs of the expansion in the IMF’s range of activities, most of these originating from the developed country membership, such as the IMF’s increasing work on standards and codes and financial sector assessments.”

Without a thorough reassessment of the role the Fund should be playing in managing the global economy, and thus a determination of which Fund activities are useful, supplementing the Fund’s income through the committee’s recommendations may end up relieving the pressure on the Fund to reform.

Debt campaigning groups were taken aback by the suggestion that gold be sold to pay administrative expenses. For years they had campaigned for gold sales to be used to fund debt relief for low-income countries, only to be told that gold sales were not a possibility. Sony Kapoor, a UK-based consultant on international development finance wrote, “The use of scarce international public resources to bail out what is widely regarded as an increasingly irrelevant, bloated institution, complete with a shiny and expensive new building, is both economically and morally indefensible. The case for the use of gold to finance under-funded international public goods or to provide some of the missing resources to meet the Millennium Development Goals remains as strong as ever.”

Nancy Birdsall of the US-based think tank Center for Global Development agreed that the administrative expenses of the IMF was not the first place that proceeds from gold sales should be used. “The US Congress ought to look kindly on any request for a limited gold sale meant to enable the IMF to write off its unrecoverable loans to Liberia, upholding the principle of creditor accountability, before other uses for the IMF’s gold are debated.”

The IMF executive board will discuss the Crockett report this spring but given de Rato’s comments that “these Committee recommendations will need a period of internal discussion”, it is unlikely that the board will be able to do more than submit a progress report to the Spring meetings of the IMF in April.